Refining Regulatory Regimes: Utilities in Europe

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Refining Regulatory Regimes

Refining Regulatory Regimes Utilities in Europe

Edited by

David Coen University College London, UK and

Adrienne Héritier European University Institute, Italy

Edward Elgar Cheltenham, UK • Northampton, MA, USA

© David Coen and Adrienne Héritier, 2005 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical or photocopying, recording, or otherwise without the prior permission of the publisher. Published by Edward Elgar Publishing Limited Glensanda House Montpellier Parade Cheltenham Glos GL50 1UA UK Edward Elgar Publishing, Inc. 136 West Street Suite 202 Northampton Massachusetts 01060 USA

A catalogue record for this book is available from the British Library Library of Congress Cataloguing in Publication Data Refining regulatory regimes: utilities in Europe/edited by David Coen and Adrienne Héritier. p. cm. Includes bibliographical references and index. 1. Public utilities—Europe. 2. Public utilities—Government policy—Europe. I. Coen, David, 1967– . II. Windhoff-Héritier, Adrienne, 1944– . HD2768.E8514R43 2006 363.6’094—dc22 2005044215 ISBN 1 84542 387 9 Printed and bound in Great Britain by MPG Books Ltd, Bodmin, Cornwall

Contents List of figures and tables List of contributors Acknowledgements List of abbreviations 1

vii viii ix x

Introduction: redefining and refining regulation David Coen

1

PART I INSTITUTIONAL CHANGE AND ENVIRONMENT 2

3

Developments in regulatory regimes: comparison of telecommunications, energy and rail Dominik Böllhoff Administrative costs of reforming utilities Michael W. Bauer

15 53

PART II BUSINESS–REGULATOR RELATIONSHIPS 4

5

Changing business–regulator relations in German and UK telecommunication and energy sectors David Coen Managing regulatory developments in rail: compliance and access regulation in Germany and the UK Adrienne Héritier

91

120

PART III IMPLEMENTATION AND REFINING POLICY 6

7

The politics for a sustainable energy industry: renewable energy policy in the United Kingdom and in Germany André Suck

147

Public services: the role of the European Court of Justice in correcting the market Leonor Moral Soriano

183

v

vi

8

Contents

Conclusion: refining regulatory regimes Adrienne Héritier

Appendix: list of interviews Bibliography Index

212

218 221 247

Figures and tables FIGURES 1.1 1.2 3.1 3.2 3.3

Changing regulatory market Post-delegation, emerging powers and political clawback Visualisation of post-reform administrative costs development EU Acts in telecommunications, electricity and rail ECJ judgements in telecommunications, electricity and rail

3 5 60 81 82

TABLES 2.1 3.1 3.2 3.3 3.4 3.5 3.6 3.7 6.1 6.2 6.3 6.4

Summary of converging trends in Britain and Germany Stages model of administrative costs development Three origins of post-reform administrative costs OFTEL staff numbers and running costs Overview RegTP: regulation, decisions, staff and filed lawsuits OFGEM and OFFER staff and OFGEM operating costs ORR staff and operating costs, DTLR staff and OPRAF-SRA staff Assessment of sectoral administrative costs Status of Non-Fossil-Fuel Obligation Commissioned capacity of Non-Fossil-Fuel Obligation round The Renewable Sources Act 2000 The Amended Renewable Sources Act 2004

vii

51 55 57 61 66 70 78 84 154 155 173 176

Contributors Michael W. Bauer, University of Konstanz, Germany. Dominik Böllhoff, Federal Ministry of the Interior, Germany. David Coen, University College London, UK. Adrienne Héritier, European University Institute, Italy. Leonor Moral Soriano, Granada University, Spain. André Suck, FernUniversität Hagen, Germany.

viii

Acknowledgements This volume is the culmination of a co-ordinated Anglo-German study between the Max Planck Institute and University College London, and represents a single research monograph rather than an edited collection. In studying how business manages its regulatory relationships in the UK and Germany, and how regulators evolve beyond their initial delegation of powers, this book provides a topical interpretation of regulatory reform in Europe. But it is also hoped that the results have practical and theoretical implications for how we analyse regulation and redesign regulatory institutions. A comparative project of this size always depends on more than just the authors of the study. We would therefore like to thank all those who agreed to be interviewed in government, regulators and industry – without their reflective insights this project would have stalled at the first hurdle. Having collected our primary data we benefited from insights from academic colleagues and practitioners at our London and Bonn regulatory workshops. In particular we would like to thank Burkhard Eberlein, Edgar Grande, Jon Stern and Mark Thatcher. Finally we would like to extend thanks to Ray Cunningham and the Anglo-German foundation for funding the core of this project. On the British side of the project, we would like to thank the Regulation Initiative at the London Business School for hosting and part-funding the early research, and individuals such as David Currie, Martin Sinner and Paul Willman for discussing aspects of the early research design. More recently, David Rowland (UCL) and Wyn Grant gave valuable comments on various drafts of the book. From the German perspective, special thanks should go to the Max Planck Foundation and the Bonn Max Planck Project group for also part-funding and hosting the project, and to Yannis Karagiannis at the European University Institute for his most valuable support. David Coen and Adrienne Héritier London and Florence

ix

Abbreviations AC FCC NRA PA PD PTT R&D RPI ULL

administrative cost Federal Communications Commission (USA) national regulatory authority principal–agent political delegation post, telegraph and telecommunications utilities research and development retail price index (RPI-X is a formular for profits that subtracts X from the RPI) Unbundled Local Loop

EUROPEAN UNION ATOC APEC CEETB CER COCOM DERC DG DG IV DG XVII

DTLR ECJ ECTEL EFED EROS EU Eurosolar

Association of Train Operating Companies Association of Private European Cable Operators Comité Européen des Equipements Techniques du Bâtiment Community of European Railways Communication Committee Developing European Railways Committee director-general EU Commission’s Directorate General for Competition Policy EU Commission’s Directorate General for Telecommunications, Information Technologies and Industries Department for Transport, Local Government and the Regions European Court of Justice European Telecommunications and Professional Electronics Industry European Federation of Energy Traders European Rail Observation System European Union European Association for Renewable Energies x

Abbreviations

HLCG IEM nTPA OECD RET rTPA SBS TPA UIC

High Level Communication Group internal energy market negotiated Third Party Access Organisation for Economic Co-operation and Development renewable energy technology regulated Third Party Access Single Buyer System Third Party Access Union Internationale des Chemins de Fer

UNITED KINGDOM BG BR BRB BSC BT BVerfG BWEA CC CEGB CHP CLG CWP DEn DETR DGES DGGS DGT DNO DoT DTI EST FOCs FT GOR HSE MMC NETA NFFO NGC

xi

British Gas plc British Rail British Rail Board Balance and Settlement Code British Telecom Federal Constitutional Court British Wind Energy Association Competition Commission Central Electricity Generating Board combined heat and power Company Limited by Guarantee concurrent working party Department of Energy Department of Environment, Transport and Regions Director for Electricity Supply Director-General of Gas Supply Director-General of Telecommunications distribution network operator Department of Transport Department of Trade and Industry Energy Saving Trust freight operating companies Financial Times Government Office of the Regions Health and Safety Executive Monopolies and Mergers Commission New Electricity Trading Arrangements Non-Fossil-Fuel Obligation National Grid Company

xii

NWP OFFER OFGAS OFGEM OFT OFTEL OFCOM OPRAF ORR PO RDA REC RI RO ROC RT RF SRA ROSCOs TOCs UoW

Abbreviations

National Wind Power (subsidiary of RWE Innogy) Office for Electricity Regulation Office for Gas Regulation Office of Gas and Electricity Markets Office of Fair Trading Office of Telecommunications Office for Communications Office of Rail Passenger Franchising Office of Rail Regulation Post Office regional development agency regional electricity companies Rail Inspectorate Renewables Obligation Renewables Obligation Certificate Railtrack rail forum Strategic Rail Authority rolling stock companies train operating companies University of Warwick

GERMANY AA AEG AGV BAPT BauGB BEE BEWAG BDI BDW BGH BGW

associations’ agreement (Verbändevereinbarung) Rail Law (Allgemeines Eisenbahngesetz) Working Comittee of the German Consumer Associations (Arbeitsgemeinschaft der Verbraucherverbände) Agency for Postal and Telecommunications (Bundesamt für Telekommunikation und Post) Federal Building Laws German Renewable Energy Federation (Bundesverband Erneuerbare Energie e. V. Berliner Kraft und Licht AG, Energy Operator Federal Association of German Industry (Bundesverband der Deutschen Industrie) Federal Association of Hydroelectric Power Operators Federal Supreme Court (Bundesgerichtshof) German Gas and Water Association (Bundesverband der Deutschen Gas- und Wasserwirtschaft)

Abbreviations

BMF BMFB BKartA BMU

BMWA BMWi BMWT BMPT BMV BMVBW BVerfG BWE DB DBB DBAG DEWI DGW DLR DNO DTAG EBA EdF EEG EnBW EnWG E.ON ESI FAZ FEDV GDR GWB ISET IWB

xiii

Treasury (Bundesministerium für Finanzen) Federal Ministry of Research and Education (Bundesministerium für Forschung und Bildung) Federal Cartel Office (Bundeskartellamt) Federal Ministry for the Environment, Nature Conservation and Nuclear Safety (Bundesministerium für Umwelt, Naturschutz und Reaktorsicherheit Federal Ministry of Economics and Labour Ministry of Economics (Ministerium für Wirtschaft) Federal Ministry of Economics and Technology (Bundesministerium für Wirtschaft und Technologie) Ministry for Postal and Telecommunications (Ministerium für Post und Telekommunikation) Ministry of Transport (Ministerium für Verkehr) Ministry of Transport, Building and Housing (Ministerium für Verkehr, Bauen und Wohnen) Federal Constitutional Court Federal Wind Energy Association Deutsche Bahn Deutsche Bundesbahn Deutsche Bundesbahn AG German Wind-Energy Institute German Society for Wind Energy German Aerospace Centre (Deutsches Zentrum für Luftund Raumfahrt) distribution network operator Deutsche Telekom AG Federal Rail Agency (Eisenbahnbundesamt) Electricité de France, French Energy Operator Renewable Energy Sources Act (Erneuerbase-EnergienGesetz) Energie Baden-Württemberg AG, Energy Operator Energy Law (Energiewirtschaftsgesetz) E.ON, energy operator Electricity Supply Industry Frankfurter Allgemeine Zeitung Free Energy Supply Association (Freier Energiedienstleister Verband) German Democratic Republic Cartel Law (Gesetz gegen Wettbewerbsbeschränkungen) Institut für Solare Energieversorgungstechnik Inland Wind Power Association

xiv

Abbreviations

M&A mergers and acquisitions MWMT NRW Ministry of Economics, Medium-sized Businesses and Technology of North Rhine-Westphalia (Ministerium für Wirtschaft, Mittelstand und Technologie des Landes Nordrhein-Westfalen) NARA Negotiated Network Access Regime – Agency RegTP Regulatory Agency for Telecommunication and Post (Regulierungsbehörde für Telekommunikation und Post) RWE Rheinisch-Westfälische Elektrizitätswerke Energie AG, Energy Operator RIVA RIVA Energie AG, Energy Operator SPD Social Democratic Party (Sozialdemokratische Partei Deutschlands) StrEG Electricity Feed Act TKG Telecommunications Law TSO transmission system operator (Verbundunternehmen) VATM Association of the Providers of Telecommunications and Value Added Services (Verband der Anbieter von Telekommunikations- und Mehrwertdiensten) VDEW German Electricity Association (Verband der Elektrizitätswirtschaft) VON Association of the German Systems Operators VEW Vereinigten Elektrizitätswerke Westfalen AG, former German Energy Operator, merged with RWE VIK Association of the Industrial Energy Producers (Verband der Industriellen Energie- und Kraftwirtschaft) VKU German Association for Local Utilities (Verband kommunaler Unternehmen) ZSW Zentrum für Sonnenenergie- und Wasserstoffforschung

1. Introduction: redefining and refining regulation David Coen INTRODUCTION As European states move away from public ownership a new method of political control over public utilities is emerging. In the 1990s, member states of the European Union gradually liberalised their utility sectors and new ‘regulatory states’ emerged to govern the natural monopoly aspects (Majone 1997; Moran and Prosser 1994). However, the style of political delegation to regulatory authorities has not followed a uniform trajectory, rather institutional endowments, administrative traditions, market structure and business culture have all influenced the creation of regulatory authorities and the form of implementation (Eberlein 2000; Thatcher 2001). Although we note the variance between governments in the formal delegation of powers to national regulatory authorities, the chief focus of this book is on the postdelegation period; that is, how the regulatory regimes monitor their day-to-day objectives, and how they are redefined by institutional, business and legal interactions. We address these questions from a multiple institutional and multiple level perspective looking at how different national regulatory traditions, institutional endowments, and European Union (EU) pressures hinder or help the functioning of new regulatory markets. Specifically, this book considers the impact of liberalisation and the introduction of new regulatory structures on three utility sectors in the UK and Germany: telecommunications, energy and rail. With regulation seeking to foster competition while at the same time protecting essential services, we investigate regulatory styles (Böllhoff), costs of ‘new’ regulatory functions (Bauer), how regulatees (firms) in the new regulatory landscapes access and influence regulatory authorities (Coen and Héritier) and, finally, the broader policy implications for this new regulatory environment (Suck and Soriano). These changes raise a number of important questions about the level of political delegation, the structure and function of regulatory authorities, as well as the impact on policy outcomes. Accordingly, this book attempts to determine how regulatory authorities emerge and evolve under different state 1

2

Refining regulatory regimes

traditions, and assesses over time the degree to which there is potential for convergence, divergence or continued differences as regulatory functions mature.

EVOLUTION OF REGULATION: POST-DELEGATION AND POST-PRIVATISATION Recent comparative European regulatory literature has focused on the formal institutional arrangements between the political principal and the national regulatory authorities (NRAs); be these Competition Authorities, Regulatory Agencies or Voluntary Access Agreements (Eberlien 2000; Gilardi 2002; Levi-Faur 1999; Thatcher 2003). This volume moves beyond this principal–agent (PA) discussion of delegation to explore how regulatory powers evolve and redefine their functions in a fast-changing European economic and political marketplace. In so doing, we recognise that the regulatory environment is in flux and that NRAs shirk and slip from their delegated powers (Huber and Shipan 2002). How NRAs play the regulatory game is therefore a function of the market they are regulating, the institutional design they inherit and their institutional interests. In discussing markets, we are aware that as competition grows the need for regulation will wane, but also note the importance of institutional endowments in affecting regulatory change. In this regard attention must be directed towards the statutory objectives of the NRA and ex ante controls and procedures as this frames the opportunity structure for NRAs and regulatees, as well as NRAs and political principal games. In addition we believe it is correct to focus on the delegation of discretionary and ex post powers that emerge over time. Creating Markets and Competition a Process of Regulatory Change Business regulation is required because free markets can fail to deliver efficient and equitable outcomes. Monopoly abuse in retail and wholesale markets may call for the distribution process to be regulated, and discrimination across customers may lead to calls for regulation to affect the structure of prices. In the former case, regulation is undertaken to achieve efficiency, and in the latter case regulation is motivated by fairness or equity considerations (Baldwin and Cave 1999). As this volume explores, depending on the characteristics of the sector and political goals of individual countries, the emphasis of regulation will alter. As an example, attempts to encourage liberalisation and competition in the energy and telecommunications sectors, have been accompanied by regulatory measures to ensure access to

Introduction: redefining and refining regulation

3

Regulatory intensity

transmission, and to provide universal service coverage with geographic uniformity Significantly, liberalisation in European utilities has resulted in business moving along a three-phase path (see Figure 1.1) from early post-privatisation monopoly (Phase 1), to a monopoly with limited competition (Phase 2), through to potentially fully competitive markets (Phase 3) (Bergman et al. 1998). However, as we will see in this volume, there is considerable diversity in the degree of competition that can be achieved across sectors and countries. Business telecommunication services are closest to the competitive stage, much of energy and residential telecoms is in the mixed period with large incumbency dominance and third party access problems, while rail networks, with the exception of freight, is still arguably a natural monopoly. Accepting that there is a market progression through the three phases, we can also assume that regulatory intensity (creation of regulators, law-making, monitoring of business activity and court cases) alters over time and is sector assessed. In Phase 1, regulatory focus is on prevention of monopoly market power abuse, and is a period of active institution-building and rule-making, while at the same time attention is given to high levels of compliance monitoring. Nevertheless, while one would expect firms to want privatisation to succeed, this intensive regulatory period is often hindered by asymmetric information exchanges between monopoly and regulator (Coen and Héritier, this volume; Coen and Willman 2000; Parker 2004). Under these conditions regulatory costs gradually begin to increase as the number of staff required to monitor regulatory activity increases and monopoly abuse cases rise (see Bauer in Chapter 3, this volume). Regulatory activity and costs can be

MONOPOLY Regulatory focus on the prevention of monopoly abuse

MONOPOLY AND COMPETITION Regulation deals with retail and connection prices

COMPETITION Light regulation Time

Figure 1.1

Changing regulatory market

4


expected to peak in Phase 2 as the introduction of competition requires that the regulator monitor not only retail markets, but connection prices and competition rules. In this period, information for the regulatory authorities potentially increases as the number of actors and interests increases. However there are also potential risks associated with institutional conflicts as overlapping competencies between regulators operating at different levels and national competition authorities emerge (see Böllhoff and Soriano in Chapters 2 and 7). Finally, while this book does not directly address Phase 3 of the cycle, we can envisage competition emerging in a number of sectors and regulation becoming increasingly light handed. However, as we know from the study of institutions it is not always the case that regulatory authorities step back as the rationale for their existence diminishes, and it is possible to envisage examples of how more social or environmental regulatory functions could emerge at the expense of efficiency and competition directives (see Suck and Soriano in Chapters 6 and 7). In sum, the emergence of competition over time means that the emphasis and style of regulation can and does change. In areas where there is clear potential for monopoly abuse or a strong incumbent firm we would expect to see continued ex ante regulation where market entry rules and price access are clearly defined. Gradually, as competition emerges it may be possible for a regulator to turn more to ex post regulation either through its own process of benchmarking or via competition authority judgements. An important question then arises as to whether a regulator that has been delegated strong ex ante powers would entrust these new responsibilities to competition authorities, or, vice versa, whether a strong competition authority would be willing to allow the emergence of a strong and independent regulatory body in the post-privatisation period (see Böllhoff and Coen in Chapters 2 and 4). Regulatory Shirking, Slippage and Clawback Just as we can observe a change in the level of regulatory activity and the nature of the market behaviour over time, it is also possible to assess the degree to which regulatory authorities deviate from the scope of the powers which were delegated to them and the opportunities for NRAs to ‘clawback’ power from their political masters. With the EU liberalisation directives in the late 1990s, member states were required to separate regulatory control and ownership of their utility industries (Coen and Thatcher 2000; Eberlien 2000; Gilardi 2002). The result in most states was the creation and delegation of powers to NRAs or the market (see Table 2.1 in Chapter 2). Beyond the political considerations of EU legislation, principal–agent (PA) literature provides a rationale for the transfer of powers to NRAs. The benefits for political principals which are said to result from delegating


5

Regulatory deviation from PD

decision-making powers to regulatory authorities include the technical and market expertise of agents, the potential to shift blame for policy decisions and the ability to demonstrate a credible commitment to efficient market developments (Levy and Spiller 1996; Majone 2001). However, while benefits can accrue from delegation, risks also exists if an independent regulator chooses to follow its own preferences at the expense of the political goals it has been set (McCubbins 1985), or if the institutional structures and incentives encourage activity contrary to those envisaged by the principal (Huber and Shipan 2000). While aware of the benefits of delegating to NRAs, this volume is more interested in exploring how regulators deviate from the political delegation (PD) over time (Figure 1.2) by utilising their formal regulatory independence and informal discretion to distance themselves from initial political objectives (shirking) and by increasing their own powers to, it is hoped, improve the regulatory environment (slippage). In period 1 (t0–t1) NRAs are faced with a monopoly and information asymmetry, and as such require political credibility and legitimacy that comes from formally delegated powers if they are to exert influence on market developments (Hall et al. 2000). Gradually, as the NRAs’ technical knowledge and resources increase, they can be expected to assert their statutory goals by utilising formal court procedures and delegated powers. As such we can expect incremental changes from the PD1 as legal precedence builds up in the regulator’s favour (Moran 2003). However, as Böllhoff elaborates in this

To PD1 Figure 1.2

T1

PD2

T3

Post-delegation, emerging powers and political clawback

6


volume, NRAs are still under the principals’ shadow, with many member states maintaining control of NRAs’ budgets, director-general nominations and licensing in these early periods of market creation. While many of the formal ex post powers of the regulator, such as removal of a director-general, have rarely in practice been used in the EU member states (Thatcher 2005), the threat in the early periods of regulator-building is tangible and acts to deter too much independent activity. As Bauer also illustrates in this volume (Chapter 3), budgetary powers exert a strong hold over NRA activity and the potential for deviation in the early periods of regulatory development can have huge implications for the ability of the NRA to step into and manage the second phase of market regulation. The second phase, a period of competition and monopoly (t1–t2), is characterised by an increasing number of interest groups, both economic and social. As a result, information available to NRAs increases and interest groups and business are played off against one another (Coen and Willman 1998). Under such complex conditions it is not unreasonable to assume a shift from the NRAs’ rigid use of ex ante regulation to ex post controls such as oversight procedures. In such conditions, business regulatees and NRAs recognise the importance of exchanging information and reputation building. National regulatory authorities, especially, use their discretion to favour those actors who have proven themselves in the regulatory process. The Coen and Héritier chapters in this volume (Chapters 4 and 5), explore how the NRAs, in creating this informational arrangement, can build a potential institutional base and political constituency which can provide them with the capacity, initially, to shirk and distance them from their political principals. To advance the argument, Böllhoff, Coen and Héritier observe that a regulatory structure in Phase 2 is often complicated in member states with multiple authorities with overlapping competencies on the vertical (EU to national) and the horizontal level (national). This complex web of overlapping competencies has implications for business–regulator relations and for the independence of the NRAs vis-à-vis their political principals. At the national level, discontented business or NRAs can use the competition authorities and procedural courts to alter regulatory procedures (see Coen and Böllhoff, Chapters 4 and 2 respectively, in the case of telecommunications and Héritier, Chapter 5, for rail examples). At the European level, the EU can act as a political principal via European Court of Justice (ECJ) and Commission competition judgements on issues such as universal services goals (see Soriano in Chapter 7) as well as through issuing liberalisation directives. These last points illustrate well the risks of renegotiating the political delegation. Just as an NRA may change the terms of contract or licence of firms that have failed to attain the appropriate levels of performance or provide fair connections, the courts may also rule on the openness and


7

transparency of a regime. In addition, political principals may renegotiate the terms of delegation (PD2). This is likely to occur if a government feels that the NRA has moved too far from its original delegation and is pursuing its own market agenda, or that the market structure has changed. If this was the case, we would expect to see the director-generals of NRAs removed, their budgets cut or their formal powers altered. While the removal of director-generals or the issuing of fines has not been observed in the energy and telecommunications sector, Böllhoff, Bauer, Coen and Suck’s chapters (2, 3, 4 and 6 respectively) all observe aspects of the need for changes in the regulatory goals which are set as markets evolve. The maturing of the UK energy and telecommunications sector led to the creation of new regulatory bodies in the form of Ofcom and Ofgem. While the crisis in the privatised UK rail industry led, as Héritier has observed (Chapter 5), to complete redesign and re-politicisation of the regulatory objectives. The second pressure for change arises as a result of political and ideological change within government. As the government’s agenda changes, the emphasis of regulation alters – thus an NRA established with delegated powers to encourage competition and efficiency may be at odds with a government that now seeks an equity or ‘green’ agenda. How new norms can be incorporated into existing regulatory environments is the focus of Suck’s chapter on sustainable and renewable energy policy (Chapter 6) and is touched upon in the energy and rail cases studies of Coen and Héritier (Chapters 4 and 5). As noted above, the emergence of full competition in Phase 3 is not the central focus of this book. While it is perhaps too early to characterise this period, assuming the institutional lag and market development which will occur in the telecommunications, energy and rail sector, what can be said is that it is highly unlikely that NRAs will disappear over night. Moreover, their regulatory function may alter from that of market-making to that of marketcorrecting. Which institutions and countries are more likely to adapt their regulatory initiatives towards market-correcting aspects like renewable energy or social policies are explored in Suck’s contribution (Chapter 6). Are these Processes Converging across Europe? In summing up the above discussion, the volume as a whole sets out to explore the pressures and constraints on regulatory evolution. The changing nature of markets and technological innovation are clearly at the forefront of many of the developments we observe in the management of markets and the style of regulation. However, institutional interests, political goals and ideologies also play a large part in how the broader liberalisation agenda is implemented and regulated.

8


Thus, while we can observe that regulatory intensity and political divergence from initial political delegation will increase post-privatisation and continue to rise until full competition, we cannot say that these changes will occur in a uniform or convergent way across sectors or countries. The political activism of ministries, the legacy of embedded legal traditions and administrative cultures, as well as sectoral differences, will all ensure that individual regulatory regimes will remain distinct. Therefore, while not attempting to define a European best practice for managing regulation, all the contributions in this volume illustrate how the process of refining regulation has the capacity to take on a life of its own by identifying the processes and actors that are at work.

ORGANISATION OF THE BOOK The telecommunications, energy and rail sectors were chosen as the central case studies for this book as these industries are important for the economic performance of the European economy and provide important inputs to other sectors of the economy. Moreover, they are all industries in which important boundary shifts at different levels have occurred and are likely to occur over the next five to ten years. Thus in all these sectors industry boundaries are shifting with technological developments, market range is altering, company boundaries are shifting as cross-sector mergers become possible with deregulation, and regulatory boundaries are shifting (Thatcher 2001). Nevertheless, they are all vertically structured network industries that contain important elements of natural monopoly or essential facilities, and hence require economic regulation. In addition, they all exhibit some non-economic regulation, whether social, environmental or safety (see Suck, Chapter 6 in this volume). All have been the subject of EU-wide regulation in the form of EU directives (Eising 2000a; Schmidt 2002). However, the sectors also exhibit important contrasts in that they vary: with respect to the speed, and possible degree, with which effective competition will emerge; in technological innovation; in the balance between economic and non-economic regulation; in the balance between national and supra-national regulation; and in the acceptance by business of institutional and self-regulation. In all the chapters we conducted high-level interviews with all the regulatory authorities at the national and European levels and with a representative cross-sample of industry, taking account of the fact that business’ institutional preferences vary with size, origin and market position (see Appendix). Hence we included incumbents in energy, rail and telecommunications in the two national markets, incumbents entering a new market (whether defined by geography or by product), new entrants from outside the


9

EU market, and new start-ups. These differences we assumed were likely to influence their assessment of alternative regulatory systems across countries and between national regulatory options. We took three different comparative perspectives in answering the questions outlined in the process of regulatory evolution set out above. In Part I of the book we described and compared the regulatory regimes in the UK and Germany with their different political institutional architectures, administrative traditions and economic legacies (Wilks 1996). Particularly important are the constraints on the discretion of executive and legislatures that arise from different interrelationships between legislative, executive and judicial institutions (Levy and Spiller 1999). We take a comparative perspective with regard to the structure of the regulatory arrangements: we distinguish between multiple-authority structure and a single-authority structure at the horizontal (national regulatory regime) level and vertical level (EU interaction with national). In exploring these levels we specifically examine how formal and informal regulatory institutional structures emerge and develop in different countries and sectors. This book assesses the creation of new regulatory authorities, and assesses what features are different in the administrative and regulatory cultures of the respective national and sector regimes. All the chapters contribute to this debate by assessing the degree to which the state has ‘rolled back’ from market governance in the light of liberalisation and assess the emergence of independent regulators and self-regulation. More specifically, in this part we consider the question of whether the regulator can and does evolve after the initial delegation of power. More precisely, we ask whether the regulatory discretion and independence of NRAs will continue or even increase in this period or whether we are likely to see continued political monitoring or even the re-emergence of politicisation as in the case of the UK rail and German energy sector. Secondly, if we assume change can and will occur, can we expect that similar regulatory patterns will emerge even if initial regulatory arrangements differ across sectors and countries. In exploring the above, the contribution by Dominik Böllhoff (Chapter 2) provides a systemic and detailed description of different regulatory regimes from a comparative administrative perspective and attempts to assess the converging and diverging aspects of the respective regulatory regimes in Germany and the UK. Specifically he looks at how a number of regulatory authorities with potential overlapping competencies define their roles in a dynamic regulatory space. The chapter explores in detail the degree to which governments have defined the regulatory environment and the independence and discretion that has been delegated to regulatory authorities. The chapter also explores the degree to which ministerial interferences can still be observed in Germany and the success of UK independent regulators in

10


distancing themselves from government, with the notable exception of the railways. Finally, like the Coen and Héritier chapters, the Böllhoff chapter touches upon the opportunity structures of the regimes by discussing the regulatee and regulator relationships and how these interests (both institutional and economic) can, via national and European courts, define the powers and the competencies of national regulatory authorities. The overall contribution to the regulatory debate of this volume is therefore to contextualise the complex and dynamic regulatory environment in which public utilities are delivered. Michael Bauer (Chapter 3) assesses the administrative costs of regulatory reform in the UK and Germany in light of the tensions between securing a competitive market and the continued provision of general interest services. Accepting that privatisation and liberalisation of the utility markets were introduced to improve economic efficiency, and reduce public expenditure and political intervention, this chapter attempts to assess whether there has been a visible reduction in the public burden. Specifically, Bauer finds that while privatisation has resulted in the demise of command-and-control regulation, new administrative costs have emerged in light of the re-regulation of market incentives (Majone 1997). Thus, in addition to showing the administrative burdens of different regulatory models, this chapter demonstrates the economic costs of different political and regulatory objectives, such as the provision of public goods. Drawing on the above context David Coen and Adrienne Héritier – in Part II – analyse, the business–regulatory relationships in Germany and the UK. In particular, they look at how various institutional and regulatory arrangements provide different ‘access’ opportunities for business to influence the regulatory debate, and the degree to which it creates problems for compliance and for the implementation of regulatory rules. In taking a comparative perspective on the type of firm, they recognise that regulatory behaviour varies with business size, origin and market position. Hence, they expect access and contract compliance/implementation to vary according to the nature of the firm. For this reason they distinguish between incumbents that have a long-standing relationship with governments and those who are new market entrants. Finally, they distinguish between large firms that call upon significant resources and small and medium companies that are faced with tight budget constraints. It should, however, be emphasised that the aim of this contribuion is not to try and account for the policy impact of business on actual regulatory directives or contract. Rather, the aim is to analyse how firms interact and define the regulatory regime in which they operate. In their separate contributions Coen and Héritier explicitly focus on understanding the interactions between German and UK firms and their national regulatory institutions, and the influence of these exchanges on the


11

development of post-delegation regulatory structures. Both recognise that a key question in the development of European regulation is the appropriate level and style of regulation. In fact, as liberalisation leads to greater crossborder company relationships, national regulatory authorities may find it more difficult to deal effectively with inter-jurisdictional problems, and for this reason they also assess the impact of cross-country learning by business and the role of the European Commission in fixing/establishing national business–regulatory relations. However, both accept that informational asymmetry in the regulatory exchange between companies and regulators means that national authorities are better informed about local conditions, and are therefore better able to act decisively on breaches of regulatory rules. The chapters illustrate which regulatory competencies are best centralised, which are best co-ordinated at supra-national level, and which are best left to national authorities. This is of particular interest since these perspectives will often inform regulatory activity and the provision of services. Finally, Part III describes the impact of politics and regulatory authorities on policy development. Just as the earlier chapters focus on the importance of changes in government for policy preferences, this part explores systematically how multiple levels of regulations and institutions influence the development of policy. André Suck’s chapter (6) tackles the question of variance in market-correcting policy between the UK and Germany by focusing on the development of renewable energy policy. His central hypothesis is that unitary states have a better problem-solving capacity, due to less veto players, and that federal states have an inbuilt institutional barrier to reform policies (Scharpf 1988). He explains the ‘better’ policy outcomes in the German federal system in terms of the political-administrative cultures and the role of different policy paradigms over time. Thus he makes an argument for comparative policy analysis in EU states to be time contingent. While Suck takes a comparative study of market correcting policy, Soriano (Chapter 7) provides us with a detailed multi-level study of the role of the ECJ in the assessment of the provision of public services. By analysing how the ECJ has assessed the legality of state intervention under competition law rather than free trade rules, she demonstrates how the EU has given nation-states some discretion in how they provide public services All these themes are, of course, interlinked. Institutional developments and costs are a function of business–regulatory relationships. Policy-outputs feed back into policy developments, which in turn influence the agenda-setting role of politicians, institutions and actors. However, as regulatory institutions and policy studies mature it is important that we understand how the regulatory processes emerge after political delegation and what factors influence redefinitions and refinements in the regulation of the European utility market.

PART I

Institutional Change and Environment

2. Developments in regulatory regimes: comparison of telecommunications, energy and rail Dominik Böllhoff INTRODUCTION Utility regulation is one outcome of the process of liberalisation and deregulation in the formerly nationalised industries. During the last 20 years, intensive changes have taken place to open utility sectors in telecommunications, rail and electricity, all of which were formerly run as state monopolies. While in the 1980s Britain initiated the denationalisation of network utilities in Europe, Germany started to deregulate the utilities sectors in the 1990s, mainly in line with legislation of the European Union. However, the marketisation in the utilities sector did not bring about the end of the state. As the sector has shifted from being dominated by monopolies to being more competitive, the state has been intensively involved via supervision, monitoring and/or enforcement procedures – summarised as ‘regulation’. With a shift from a positive to a regulatory state (Majone 1997), new regulatory regimes were put in place. These regimes are the outcome of the regulatory reforms of the state and state administration (OECD 1997). This chapter strives for a systematic and detailed descriptive comparison of regulatory regimes from a comparative administrative perspective. On the basis of analytical descriptions of the regimes, we reveal overall converging trends at both a cross-country and a cross-sector dimension. The general interest is in exploring the extent to which regulatory regimes show similar or dissimilar institutional designs. Do developments in the regimes show increasing similarities, leading to converging trends between sector regimes and countries? Or are there ongoing dissimilarities and heterogeneity between regulatory regimes? To explore these questions, the comparative focus is on regulatory regimes in two countries – Great Britain and Germany – and three sectors – telecommunications, rail and electricity. This chapter is developed in three steps. First, in an introductory section a framework or basic structure for researching the 15

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Institutional change and environment

developments in regulatory regimes is outlined. Within this basic structure, in the second section three lines of inquiry are outlined to guide the research. The third section contains six case studies of Britain and Germany on the regulatory regimes of telecommunications, energy and rail. The starting point is a short overview of the institutional design before liberalisation and the analysis of the new regulatory regime after the regulatory reform and liberalisation of the sector. The core focus is on the developments and institutional dynamics of the regulatory regime and future reform trends. On the basis of the case studies, in the concluding section the regulatory regimes are compared from a cross-country and cross-sector perspective.

THE ‘BASIC STRUCTURE’ AND THE ‘LINES OF INQUIRY’ TO RESEARCH ON REGULATORY REGIMES Since earlier research on utility regulation primarily focused on the sectorspecific regulatory institution (see, for example, Majone 1997; Schneider 2001a), this chapter underlines that there is more than a single institution involved in the regulation of the utility sectors. Apart from a sector-specific regulatory institution, a ministry of the regulator and a competition authority play central roles in the utility regulation regime. However, in the political-administrative context, the regulatory regime may include more than these three institutions. On the national level, besides the parent department, ministries such as the treasury can be involved in the regulatory process. In Germany, administrative courts play a crucial role in the regulatory decision-making process – especially in telecommunications and energy. Additionally, parliaments and committees may have an impact on regulatory regimes. On the European level with the European Commission and its director-generals (DGs) (see Coen and Doyle 2000a: 455–76), committees and regulatory fora and the European Court of Justice (ECJ), there are even more institutions which, together with the national regulatory regime, form a multi-level system of regulation (Eberlein and Grande 2000). The basic model of regulatory regimes is utilised to formulate ‘lines of inquiry’. First, the focus is on the institutional role and the development of regulatory agencies. Thus, we explore whether they have been set up, and which role they play in the regime. The question concerns the dominance of the regulatory agency in the basic structure: given their core regulatory competencies, do NRAs dominate the regime, as its core decision-maker, or are they only one player among other institutions in the regime? We are trying to confirm the claim that agencies are the central institutions within the basic structure. Additionally, the focus is on the institutional changes that affect the role of

Developments in regulatory regimes

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regulatory agencies. Can the popular argument that the growth of the regulatory state leads to a ‘general trend towards the harmonisation of regulatory approaches’ be confirmed (Majone 1997: 143)? And is there proof for the claim that regulatory agencies are similar, and that the divergence of designs is thus of minor importance (Schneider 2001b)? We explore the role of regulatory agencies in the regime (dominance) as well as the redesign and fine-tuning of agencies after they have been set up (line of inquiry 1: regulatory agency dominance). The second and third lines of inquiry question the role of the ministry and competition authority in the regulatory regime. Here, the inter-organisational relationships between these two institutions and the regulatory agencies are pointed out, that is, on the one hand, the relationship between the ministry and the regulator, and, on the other, the relationship between the regulator and the competition authority. The second line of inquiry is the relationship between the ministry and the regulatory agency. Ministries have a general supervisory function, and they steer the regulatory agency at arm’s length. Ministries do not influence regulatory decisions, and regulators are free from political interference. However, there are voices which question this view. The close relationship between ministries, regulators and companies is described as a ‘ménage à trois’ (Hall et al. 2000: 17). It is argued that the ministry intervenes in regulatory decisions. ‘Ministerial micro-management’ may exist (Döhler 2001: 18), which for its part would cause an increase in the politicisation of the regime, especially of the decision-making processes of the regulatory agency. That is why it is instructive to study ‘how much ministerial influence is direct and how much is based on anticipation by the regulators’ (Wilks 1998: 140). It is necessary to question the ‘low interference role’ of ministries, although the ‘precise roles and influences [of ministries] are difficult to determine in operational matters’ (Doern 1998: 31). Thus, we explore the role of the ministry in the regime and its special relationship with the regulator, that is, the ministerial interference in the day-to-day decisions of the regulator (line of inquiry 2: ministerial interference). Thirdly, the focus is on the role of competition authorities within the regulatory regimes. The basic structure has revealed that competition authorities occupy an important position within the regime: as competition authorities deal with issues on general competition policy, they share responsibilities with the regulators to regulate anti-competitive behaviour or the abuse of dominant position. This overlap and the vague separation of responsibilities may imply that the two institutions closely co-operate and co-ordinate their operations. However, as the analysis of the responsibilities of competition authorities and their inter-organisational relations with regulators shows, their role may vary. The tendentious increase in the sectoralisation of

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competition law (see Wolf 2000) could result in the regulator dominating issues on competition policy. This in turn could result in competition authorities developing a ‘calm role’ within the regime. Additionally, in contrast to the general claim of co-operative inter-organisational relationships (OECD 1994), the relations here are described as ‘competitive’ (Eberlein 2000; Schneider 2001). The third line of inquiry will therefore assess the interorganisational relationship between competition authorities and regulatory agencies and the general role of these authorities in regulatory regimes, especially the predominance of the authorities when behaviour is anticompetitive or when there is abuse of dominant position by one of the parties (line of inquiry 3: competition authority predominance). In the next section, the three lines of inquiry into the role of institutions within British and German regulatory regimes will be assessed. With respect to developments in regulatory regimes, the interest is in researching to what extent these lines of inquiry hold for the regimes, or whether there is a change in the institutional design within the regulatory regimes, which then affects the stance in the regimes.

CASE STUDIES ON THE REGULATORY REGIMES IN TELECOMMUNICATIONS, ENERGY AND RAIL Telecommunications In telecommunications, before liberalisation, sectors were dominated by the post, telegraph and telecommunications utilities (PTT), in which operative and regulative functions were linked together – that is, net, service and equipment. The net and service were vertically integrated in the hands of a state monopoly (in Britain the Post Office, in Germany the Deutsche Post). These monopolies worked in close co-operation with producers of the equipment as private monopolies. The strong link between political, administrative and private actors entailed ‘highly closed games’ and strong state-intervention (Thatcher 1998: 123). A key outcome of the transformation of the PTT was the setting up of regulatory agencies (NRAs). Britain, and later Germany, opted for the regulatory agency model with the setting up of the Office for Communications (OFCOM) and the Regulatory Authority for Telecommunication and Post (RegTP). Great Britain: from telecommunications to communications regulation Before regulatory reforms were initiated in the 1980s, the British PTT model included the Post Office (PO), defined as a public corporation with postal as well as telecommunications services. General policy decisions were taken


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over by the Ministry for Post and Telecommunications, which was not an independent ministry, but part of the Department of Trade and Industry (DTI) (Thatcher 1999c: 94ff.). The transformation of the telecommunications sector started with the Telecommunications Act 1981, which split the PO into two public corporations, the PO and British Telecom (BT). The separation prepared the ground for the second Telecommunications Act, in 1984, where BT was privatised and an independent regulatory body, the Office of Telecommunications (OFTEL), was created as a non-ministerial department within the ambit of the DTI. In December 2003, OFTEL was transformed to OFCOM. Traditionally, the UK has not had regulatory bodies for utility regulation. Different institutional designs were seriously considered: that is, a ministry, a competition authority or a regulatory agency (Böllhoff 2002: 241ff.). After assessing a variety of options, the regulatory agency model was opted for, and a ‘specialist look-alike’ to the Office of Fair Trading (OFT) was invented (quoted in Prosser 1997: 46). As a uniquely British feature and part of the state and administrative tradition, OFTEL was headed by a single Director-General of Telecommunications (DGT), who took decisions individually. The Office of Telecommunications was the first network and utility regulatory body in Britain. Until 2003, the Telecommunications Act 1984 was in place and the overall formal institutional design of OFTEL was not amended. However, with respect to developments in the regimes, over the years OFTEL changed its design. When the regulator was set up in 1984, Europe did not play a role in telecommunications. Since the late 1980s European directives have increased in importance. In the 1990s, and especially since the liberalisation of the whole European telecommunications market, OFTEL has had to take decisions in accordance with European legislation. Until the mid-1990s the focus of OFTEL was on infrastructure investment. With European legislation, the regulator was forced to increase competition, for example, to initiate the unbundling of the local loop. Additionally, policies also changed when the DGTs came into office. For example, Don Cruickshank, DGT from 1993 until 1997, became famous for his proposal to shift OFTEL from a regulatory to a competition authority (Hall et al. 2000: 2). Because of the increased convergence between telecommunications, broadcasting and Internet services, in 2000 the Labour government proposed establishing a new regulatory framework. It has often argued in favour of a communication office (for example, Hansard Society 1996: 51; Hogwood 1998: 92). Labour published a White Paper in which it proposed transforming OFTEL into an Office for Communications (OFCOM) (DTI 2000b). In accord with this, in December 2003 an ‘umbrella’ agency was set up combining the expertise of five thus far independent institutions: OFTEL, the Broadcasting

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Standards Commission, the Independent Television Commission, the Radio Authority and the Radio Communications Agency. With OFCOM as an economic as well as a ‘content regulator’, the goal is to attain synergy effects and to reduce communications gaps between formally independent authorities. The role of the DTI in the regulatory regime An analysis of the role of the relationship between the regulator and the DTI shows that there is no clear separation of responsibilities between the two institutions. Under OFTEL, the involvement of the DTI in licensing issues served as one prominent example: the Secretary of State not only retained the power to license new operators; in addition, the DTI had a right to veto licence modifications. As a consequence, OFTEL worked ‘in conjuncture with the … DTI [and] has relatively little independent authority’ (Beesley and Laidlaw 1995: 319). In contrast to this, OFTEL had the competency to advise the DTI on matters of telecommunications. The DTI regarded OFTEL as an expert on telecom issues, and it relied on the regulator to give specialised and detailed advice (interview DTI, February 2001). However, the DTI did not accept all OFTEL recommendations. The DTI and the Secretary of State took a strong interest in analysing OFTEL decisions and publications, for example, the consultation documents. Since the change of government in 1997, ministers had an even stronger interest not only in issues of price control, but also in consumer protection. If necessary, the DTI intervened in the decisions of OFTEL. Since British ministries do not have general or special instructions, it is only possible to informally influence regulatory decision-making (interview DTI, February 2001). However, the DTI tended to be ‘cautious about exercising its substantial backstop power over OFTEL’ (Hall et al. 2000: 91). Summing up, although in theory one might argue that the DTI and OFTEL maintained a distance from one another, in practice they co-operated closely and had a dense relationship. This result can be assumed to have continued after the set up of OFCOM. In sum, the DTI plays a central role within the regulatory regime. The role of the competition authorities in the regime Two institutions are involved with the competition authorities in the telecommunications regulatory regime: the Office of Fair Trading (OFT) and the Competition Commission (CC) – the latter was known as the Monopolies and Mergers Commission (MMC) until 2000. Regarding the modification of licences, if OFTEL and the involved company did not find an agreement, reference was made to the CC. The CC investigated the licence conditions, and then took a final decision. Competition law was often amended for issues of anti-competitive behaviour or the abuse of dominant position. As a consequence,


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responsibilities within the regulatory regime have changed, too. To prevent anti-competitive behaviour, under the 1980 Competition Act and the Fair Trading Act 1973, either the Secretary of State or the OFT referred to the MMC. However, under OFTEL the DGT was able to ask the MMC to start investigations or prescribe remedies. In 1998 a new Competition Act was set up, which greatly enhanced the powers of the OFT, especially on anti-competitive agreements and the abuse of market power. Both the OFT and the utility regulators are allowed to apply this act (OFT 2001). Consequently, a new mechanism has had to be put into place to co-ordinate the relations between OFT and the regulators (Riley 2000). A concurrent working party (CWP) was established to prevent ‘regulatory shopping’, to ensure consistent decisions, to consider practical working arrangements and to carry out general co-ordination. Although there are some doubts about whether the new mechanism will function (Riley 2000), the actors involved argue that the system works well and ensures that the Act is consistently enforced. In practice, since the 1998 Competition Act, all telecommunications cases have been decided by OFTEL, after being agreed to in the CWP. Therefore, the OFT views its role within the regulatory regime as of ‘minor importance’ (interview OFT, February 2001). Under OFCOM, on basis of an agreement between the regulator and the OFT, the CWP will continue (OFT, OFCOM 2003). Germany: the set-up and continuation of a regulatory agency While the German government traditionally viewed the PTT model as the optimal regulatory regime, in the mid-1980s it changed its mind. Parallel to reform proposals of the European Commission, the government started its own initiatives to liberalise and privatise the national telecommunications sector and to establish a new regulatory regime. The PTT was transformed into a new regulatory regime in three steps (see, for example, Grande 1999; Mette 1999). With the Post Reform 1 (1989/90), three separate operational units for telecommunications, postal service and post banking were made into public corporations. The Ministry for Postal and Telecommunications (BMPT) still holds the steering responsibilities for the sector (among other things it owns and regulates it). In 1994, with the Post Reform 2, the intention was to separate the regulatory responsibilities from ownership. While the responsibilities have been left with the BMPT, a new administrative agency – the Agency for Postal and Telecommunications (BAPT) – was institutionalised for ownership. The three public corporations were transformed into stock companies, one of which was the Deutsche Telekom AG (DTAG). With the Post Reform 3, in 1996, the decision was made to fully open telecommunications to competition by 1 January 1998. On

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the basis of a new Telecommunications Law (TKG 96), sector-specific regulation was set up with a new telecommunications regulator, the Regulatory Authority for Telecommunication and Post (RegTP), an institution under the supervision of the Federal Ministry of Economics and Labour (BMWA). The BMPT became part of the BMWA, and the responsibility for ownership was transferred to the Treasury (Bundesministerium für Finanzen, BMF). Civil servants of the BMPT moved to the newly created RegTP. Additionally, the BAPT was incorporated into the RegTP. Changes to the TKG in June 2004 (TKG 04) confirmed the set-up of the RegTP and stabilised its position in the regime. Up to 1998 Germany did not have regulatory bodies for utility regulation. The case of the RegTP shows that, instead of a traditional model, a new and – for the German administrative tradition – innovative institutional design was introduced. As the RegTP was being designed, a variety of models were closely scrutinised. However, predominantly because of European legislation and the American and British experience with sector-specific regulation in telecommunications, a regulatory agency design was opted for (Böllhoff 2002: 250ff.). With respect to the formal intra-organisation, the jury-like decision chambers are the central instrument for decision-making. These were established in order to attain independence from the ministry. In these chambers, the decisions of the RegTP are made on the basis of the TKG (Oertel 2000). The institutional design of this chamber system was adopted from the German Federal Cartel Office (BKartA), which uses a similar system. However, in addition to the decision chambers, the RegTP has a variety of traditional departments responsible for technical regulatory issues that have been taken over from the BAPT. In combining traditional administrative departments and jury-like decision chambers, RegTP is a unique institution. The RegTP views itself as being stable and does not expect major institutional changes in the near future (interview RegTP, January 2000). The regulator has only changed its design to optimise its decision-making processes with respect to internal administrative procedures. The internal organisation, especially that of the former BAPT, has been streamlined to reach ‘organisational concentration’ (interview RegTP, March 2001). New entrants support the RegTP as a necessary ‘proxy to the market’ (interview new entrant, February 2000). Additionally, in a paper on the future of the telecoms sector the Federal Ministry of Economics and Labour (BMWA) argued that a shift to general competition law would only be possible in accord with a long-term perspective. The short-term abolition of sector-specific regulation and the general regulatory framework is not an issue.


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Thus, the TKG 04 did not modify the institutional design of the RegTP. Instead, focusing on the responsibilities of the regulator, the TKG 04 shows a shift towards competition law enhancing the RegTP’s ex post regulatory responsibilities. The role of the BMWA in the telecommunications regulatory regime From a formal perspective the responsibilities of the RegTP and the BMWA are clearly separated. While the RegTP is responsible for the day-to-day decisionmaking, the ministry defines the general telecommunications policy and supervises the RegTP. There is a debate about the independence of the RegTP and the intensity of the interaction between the two institutions. In comparison to traditional administrative agencies, the ministerial oversight of the RegTP is restricted. Under the TKG 96, Article 66 (5) indicated that the BMWA was allowed to give general instructions. These instructions had to be published in the federal register, which means that there is a ‘subtle reduction’ of ministerial responsibilities (Oertel 2000: 238). Additionally, although the TKG 96 did not define whether the BMWA was allowed to give special instructions, the decision chambers are free from this form of supervision (Oertel 2000: 346, 397). Article 117 of the new TKG 04 defines that all instructions of the BMWA have to be published, which might enhance the independence of the RegTP in the future. The ministry views the RegTP as ‘fully independent’ and claims that there is no political influence on the decision-making of the RegTP (interview BMWA, February 2001; see Eschweiler 2001). As of yet, officially there is only one known case in which the ministry interfered with special instructions in a RegTP decision. By contrast, the RegTP complains of constant and subtle ministerial attempts to guide regulatory decision-making (interview RegTP, February 2000). Companies point to the fact that it is an ‘open secret’ that the BMWA closely overshadows the RegTP and interferes where necessary (interview new entrant, August 2001). The role of the BKartA in the regulatory regime From a formal perspective, the relationship of the RegTP and the BKartA is defined in the TKG and the Cartel Law (GWB, Gesetz gegen Wettbewerbsbeschränkungen). The TKG points to different grades of co-operation. There are cases – such as when there is an abuse of dominant position in the telecommunications sector – where both institutions have to agree. The BKartA has the right to comment on some decisions of the RegTP, such as decisions concerning net access or interconnection. So, too, in accordance with Articles 19 and 30 of the GWB, the RegTP is allowed to comment on BKartA decisions if the telecommunications sector is affected. Although these rules define the

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different responsibilities in the two institutions, they do not ensure a clear-cut separation. Because of the complicated distribution of responsibilities, the relationship between the RegTP and the BKartA is described as ‘competitive’, causing a ‘regulatory dilemma’ (Grande 1999). This interpretation might describe how the situation was in the first few months of the relationship in 1998, after the RegTP was established. However, because of regulatory learning, both the BKartA and the RegTP have agreed to develop a stable and co-operative relationship (interview BKartA, December 1999; interview RegTP, February 2000). In this, the RegTP is the dominating institution, while the BKartA has more ‘reserve functions’, which it uses quite passively (Schneider 2001: 279f.). Researchers describe the silence as a ‘deprivation of power’ (Selbstentmachtung) (Schroeder 1999: 27f.). Energy Like the telecommunications sector, the energy sector has also witnessed a shift from monopolistic to more liberalised regulatory regimes. In energy, we have to distinguish between gas and electricity. In Britain, different regulatory bodies were developed for the two sources, which were later merged. In Germany, two self-regulatory regimes were established. The merger of two regulatory agencies in Great Britain Great Britain was the first European country to shift its focus from ‘energy planning to the realm of competition administration’ (Sturm et al. 1998). Before liberalisation, the gas and electricity sectors were primarily nationalised industries, under public ownership. The Conservative government decided to reduce the number of nationalised industries: first, the British Gas Corporation was sold; and, later, companies from the more fragmented electricity sector were sold to the public. To ensure the influence of the state, regulatory agencies for gas and electricity were established, that is, the Office for Gas Regulation(OFGAS) and the Office for Electricity Regulation (OFFER). In the most recent developments, the two regulators have merged in the Office for Gas and Electricity Markets (OFGEM) The gas sector: OFGAS Before liberalisation, the British gas sector was a vertically integrated entity. Regulatory reforms were initiated with the Gas Act 1986. The incumbent British Gas Corporation was left as a vertically integrated body, and later – like British Gas plc (BG) – privatised as a single unit. It would have been possible to opt for a protected monopoly, but that option was criticised for its ‘limited degree of privatisation’ (Prosser 1997: 89).


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To regulate the sector, OFGAS was established. Headed by a DirectorGeneral of Gas Supply (DGGS), the main function of the regulator was to monitor BG by price caps. British Gas, as a carrier as well as a provider of gas, was ‘a monopoly carrier and a near monopoly supplier’ (Hogwood 1990: 600). Therefore, OFGAS only had to regulate one company with BG and act as a ‘surrogate to competition’ (Prosser 1997: 95). A core task of OFGAS was to ensure that the other companies were supplied with gas through the BG grid. The Gas Act 1995 aimed to open fully the gas market to competition. There were new entrants to the gas market, but BG, as a single unified company, still dominated the sector. As a consequence, in 1996 BG was forced to demerge into two companies: TransCo International is now responsible for the transport and production of gas, and British Gas Energy has taken over the responsibility for supply, retail and service. However, since there is still a monopoly in gas supply, to prevent discriminatory practices it is still necessary to regulate the sector. The electricity sector: OFFER It was much more demanding to liberalise the electricity sector than to liberalise the gas sector. In contrast to the gas sector, with only one incumbent, before the electricity sector was liberalised it already had a market structure with a complex network of actors involved. A Central Electricity Generating Board (CEGB) co-ordinated the generation and supply of the national grid. Electricity was supplied by 12 area boards, as regional monopolies. This vertically and horizontally disintegrated sector was reformed with the 1989 Electricity Act. As for power generation, the CEGB was split into three companies: for transmission a National Grid Company (NGC) was created, jointly owned by 12 regional electricity companies (RECs); it replaced the Area Boards. The RECs were privatised, and the regional monopolies were abolished to promote competition. In 1995 the NGC was privatised, too. With the Electricity Act, the core goal of the government was to promote competition in power generation and supply and ‘to regulate the behaviour of the monopoly companies in the market’ (Gilland 1996: 244). Therefore, a Director for Electricity Supply (DGES) and a new Office for Electricity Regulation (OFFER) were established. As it was a restructured industry, OFFER had to cope with special regulatory demands. Because supply and distribution were separated in the electricity sector, the regulator was mainly concerned about ensuring open access to the grid and regulating prices. The merger of offices: OFGEM Since the two separate regulators for gas and electricity have been set up, there have been proposals to merge the two institutions (see, for example, Helm 1994: 30). To rationalise decision-making and to reduce inconsistencies between the regulators in the two energy sectors,

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there was a strong impetus to merge OFFER and OFGAS into a single Office for Energy Regulation. It was not until 1997 that the new Labour government re-examined the existing regulatory framework. The regulatory approach of previous Conservative governments was criticised for being too narrow, primarily on economic regulatory issues. In contrast to the earlier approach, Labour proposed extending obligations on social and environmental regulatory issues. It also suggested aligning the electricity and gas regimes and merging the regulatory offices for electricity (OFFER) and gas (OFGAS). The core argument in favour of merging gas and electricity regulators was that there was increasing convergence between the two energy markets. With the Utilities Act 2000, OFFER and OFGAS were merged with the Office of Gas and Electricity Markets (OFGEM) (see Graham 2000a). The Office of Gas and Electricity Markets takes decisions under the Gas Act 1986, the Electricity Act 1989 and the Utilities Act 2000. The main objectives of the new regulator are to protect the interests of gas and electricity customers by promoting competition and regulating monopolies, and to enhance competition in electricity generation or gas transportation. This new energy regulator, OFGEM, will provide the regulatory model for the foreseeable future. The role of the DTI in the energy regulatory regime Before liberalisation, the gas and electricity sectors were supervised by the Department of Energy (DEn). In 1992 the Major government abolished the DEn, and the responsibilities were transferred to the DTI, which has been the sponsoring department for energy regulators since then (Eising 2000a: 158). To ensure a smooth transition from a monopolistic to a competitive system, the ministry intervened heavily in both sectors (Gilland 1996: 257f.). Additionally, the DTI influenced the sector by subsidising British Coal and by ensuring the diversity of energy sources such as nuclear energy. Analysis shows that the DTI and OFGAS were in close co-operation: For example, it was the DTI, not the regulator, who was responsible for determining price caps. Additionally, to modify price formulas, OFGAS had to negotiate these with the DTI: it was not allowed to change them independently (Hogwood 1990: 600). With the 1995 Gas Act, the DTI’s influence increased, as it was allowed to veto licence modifications. With respect to the sharing of responsibilities between the regulator and the DTI, during the existence of OFFER, the DTI held ‘strong reserve powers in addition to those of the regulator’ (Prosser 1997: 151). This is clearly indicated by the fact that the formal powers of OFFER were constrained by the DTI: the DTI was allowed to impose supplementary price caps on OFFER (Prosser 1997: 153). Additionally, the DTI had the power to issue licences, and the


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Secretary of State was allowed to veto any licence modification concerning the regulator and industry (Veljanowski 1994: 9f.). By establishing OFGEM, DTI responsibilities were maintained, such as the veto licence modifications. However, because of the Utility Act 2000 a new kind of relationship emerged. In accordance with this the Secretary of State has responsibility for guiding OFGEM on social and environmental objectives. This is seen as further politicising the regulatory process (Graham 2000b: 93, 102f.). The role of competition authorities in the regime Apart from the regulatory agency, the regulatory regime in the British Energy sector contains the Office of Fair Trading (OFT) and the Competition Commission (CC) (until 2000 the Monopolies and Mergers Commission, MMC). Focusing on the relationship between regulators and the CC, both OFFER and OFGAS had to agree with the CC on the licence changes, and OFGEM must now do so, too. If there is no agreement between the regulator and the companies, for example, on price caps, it is the CC which takes the final decision. However, because this is a time-consuming decision-making process, companies try to avoid this procedure (Gilland 1996). Especially in the gas sector, the MMC has played a crucial role in supporting the regulator’s goal of enhancing competition. In sector inquiries in 1988 and 1992 the MCC argued that BG had used its de facto monopoly for discriminatory practices and against public interest goals. It therefore paved the way for the 1995 Gas Act, which forced BG to split into two separate units (Durach 1996: 108ff.). With respect to issues on anti-competitive behaviour or the abuse of dominant position in the energy sector, with the Competition Act 1998, the relations between OFGEM and OFT changed. Similarly to OFTEL, these two institutions agreed to set up a concurrent working party (CWP) to ensure consistent decisions and optimal co-ordination. The self-regulatory regime in Germany and the shift towards an electricity regulator In the energy sector the German regulatory regime remains an exception. In contrast to Britain, Germany has not yet created sector-specific regulatory agencies. Instead, a system of ‘regulated self-regulation’, based on so called associations’ agreements (AA), has been set up (Schneider 1999: 41ff.). However, in 2001 the BMWA and the BKartA established task forces parallel to the AA’s as a supplement to reduce anti-discriminatory practices. A new Energy Law, which in late 2004 was still under debate, suggests the setting up of an energy regulator. Germany started regulatory reforms in the late 1990s. Germany opened its

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electricity and gas sectors predominantly because of international pressures on the energy sector and European legislation that promoted liberalisation of these sectors (Eberlein 2000: 85f.). Before liberalisation, the German gas and electricity sector was not dominated by one incumbent, as the British gas sector was. Instead, there were around 1000 firms involved in the provision of energy – privately as well as publicly owned. These were interconnected utilities (Verbundwirtschaft), which owned the national grid together with regional companies and municipal utilities. To install and protect the monopoly, companies concluded horizontal demarcation contracts and vertical contracts between energy suppliers and local grid companies (see Ortwein 1996: 108ff.). The state did not establish a full regulatory system in the sector. In contrast to telecommunications, this sector never had a special ministry for energy regulation. Instead, the economic ministries of the Länder defined and supervised the duties of regional energy and gas monopolies. Additionally, a variety of responsibilities, for example, the grid code dealing with technical issues of gas and electricity supply, were left to the interconnected utilities. As a consequence, the central instruments for regulation in the German electricity and gas sector are the associations’ agreements (AA, Verbändevereinbarung). Associations’ agreements are contracts negotiated between associations which represent the actors of the energy markets. They aim to define basic rules to prevent competitors from engaging in discriminatory practices and to establish transparent principles to ensure third party access. In general, AAs are thought to be flexible regulatory systems because they leave the state out of the bargaining process and are thought to be instruments which effectively solve implementation problems. The first AA was set up for the electricity sector, later followed by the gas sector. Electricity regulation One core reason for liberalising the German electricity sector was the 1996 EU directive for electricity. This directive mainly focused on the creation of competition in electricity generation; however, it pointed to the transmission and supply of electricity, too. The directive outlined regulatory models for third party access. Member states were allowed to choose between a single buyer model, or regulated and negotiated third party access (see Articles 15, 16, EC 98/30/EC). With the system of negotiated third party access, the German regulatory system distinguishes itself from other European member states. While all other states opted for a regulatory agency model, with the definition of AAs, the German energy sector ‘stands out as a regulatory exception’ (Eberlein and Grande 2000: 7). The new Energy Law (Energiewirtschaftsgesetz, EnWG), established in 1998, opened the sector to competition. Demarcation treaties were abolished and companies were obliged to provide third party access. However, it was left


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up to the companies to define procedures for implementation. Therefore, associations agreed to a first AA (AA 1) for the electricity sector in order to fill this gap. The AA 1 was set up in 1998, and it mainly defined criteria for calculating access fees on the basis of a concept of capacity-based and distance-related prices (for details see Brunekreeft and Keller 2000). Only traditional actors of the sector agreed to the AA 1: that is, the interconnected utilities (the VDEW), the industrial consumers (VIK) and the Federal Association of German Industry (BDI). However, negotiations were opened for upgraded versions of the AA 1, for example, for the new entrants to the energy market such as the newly founded Free Energy Supply Association (FEDV). With the AA 2, which was agreed on in 2000, a more market- and competition-friendly solution was negotiated. Instead of a distance-related definition of costs, the system was adjusted to regulations for access to the net. The AA 2 defines core components of the costs of transmitting energy through grids. On the basis of these components, each grid owner has to publicise the individual net access and transmission prices, and this is not distance related. Additionally, the AA 2 points out that the parties involved should agree to net access contracts (Netznutzungsverträge). In December 2001, the associations agreed on an AA 2 plus, which further specified the contract relationship between market participants and the rules of net access and net price regulation. There is continual dissatisfaction with this system of negotiated third party access. New independent electricity suppliers especially feel disadvantaged. They argue that there are ongoing discrimination practices: since the agreement is not legally binding, they blame regional and local suppliers for not sticking to the principles of the AA, specifically, not all grid owners have openly published their grid prices. Additionally, they point to the fact that there would be great variation in net access prices and overpriced switching costs. The associations agreed to further optimise the rules defined in the agreements, that is, to adapt the AA 2 to actual market developments and to abolish implementation gaps. Gas regulation For the gas sector, liberalised two years after the electricity sector, with a self-regulatory system based on associations’ agreements, a more or less similar regulatory regime was institutionalised. The AA 1 for gas was negotiated by traditional actors in the sector, that is, the interconnected utilities (the German Gas and Water Association, BGW), the industrial consumers (the Association of Industrial Energy Producers, VIK), local suppliers (German Association for Local Utilities, VKU) and the Federal Association of German Industry (BDI). The agreement on a regulatory framework for the gas sector was more complicated than in electricity, because the sector has more obstacles that

30


restrict competition. For example, since gas is not locally produced, it often has to be imported on the basis of long-term contracts, which cannot be easily modified. Different gas qualities between regions cause difficulties in the transmission of gas as well as the calculation of prices. There is a much more fragmented grid system; that is why different transmission zones on the local, regional and national level have to be taken into account when negotiating grid prices. Because of these issues on gas in the AA 1, negotiations were complicated, and the first agreement was only signed after long delays (FTD, 5 June 2000). First, the associations decided on a cornerstone paper (Eckpunkte-Papier), which contained basic principles for an agreement. In July 2000 the AA 1 defined principles for opening the sector to new competitors. The agreement outlined principles, such as the procedures for access to networks or rules for the compatibility of gas, which make the transmission through grids possible. However, the AA 1 did not include a comprehensive regulatory framework. A variety of technical details were left open, and only preliminary agreements were made, for example, on the use of different gas qualities or on the access to storage facilities (Erdgasspeicher). As a consequence, negotiations on the agreement immediately continued. New entrants, who criticised the AA 1 for its tariff system lacking transparency – the conditions for net access – saw the negotiations as a second chance to reach a more efficient basis for liberalisation (FAZ, 21 November 2000). In March 2001 a supplement to the AA 1 was implemented. More transparent principles on the access to the grids were agreed to. Additionally, the supplement clarified that new entrants have equal access to storage facilities, and it advised principles on how to deal with distribution shortages (Engpaßmanagement). With a second supplement, implemented in September 2001, apart from defining further technical details, such as principles to define transmission prices, it agreed to open the gas market for private customers in 2002. Additionally, an arbitration tribunal (Schiedsgericht) is to be established to settle contested issues and avoid going to the courts. The associations agreed to initiate negotiations on AA 2 soon (FAZ, 22 September 2001). The role of the BMWA in the energy regulatory regime With respect to the relationship of the BMWA and the associations’ agreement in the electricity and gas sector, the official rule is that the BMWA will not get involved in this system of ‘regulated self-regulation’. The BMWA does not intend to be influenced and prejudiced, and it intends to ensure its own independence in case the BMWA has to step in (interview BMWA, March 2001). However, new entrants criticise this for being ‘politically motivated un-activity’ (interview new entrant, January 2001).


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The BMWA has encouraged all involved parties and their associations to negotiate the agreements. The ministry has not only closely shadowed the negotiation process (interview BMWA, March 2001). Additionally, by threatening to set up a regulator, the BMWA has pushed the associations to intensify negotiations and come to an agreement (see, for example, FTD 2 March 2001). Since the BMWA does not influence the content of the AAs, it informally influences the negotiation processes: for example, as private consumer groups were absent from the negotiations for the AA for gas, the BMWA motivated and spurred the representatives of consumer groups (the AGV, Arbeitsgemeinschaft der Verbraucherverbände) to interfere (interview BMWA, March 2001). Additionally, the BMWA has to take over functions that a self-regulatory system is not able to deal with: for example, the ministry represents the energy sectors during negotiations at European level. When other member states send representatives from their regulatory agencies, ministerial civil servants have to do the job for the AAs. However, the BMWA has changed its role in energy regulation. In 2001, the ministry established a task force, which was ready for work at the end of the year 2001 (FAZ, 8/9 September 2001). Its goal is to prepare test cases (Musterverfahren) for grid owners for the BKartA. The task force has neither legally sanctioned responsibilities nor any enforcement powers to optimise the process of regulation (Wirtschaftswoche, 15 March 2001). The force, staffed by ten civil servants, is headed by a former director of the BKartA, who acts as a ‘person of trust’ (FTD, 1 August 2001). In sum, the BMWA plays a central role in the energy regime and has an impact on the AAs. The BMWA not only shadows the negotiations of the AAs, it also influences their outcomes. The role of the BKartA in the regime Since AAs are not enforced by law, actors within the sector utilised other state institutions to reach support. Grid owners have often agreed to provide access to their nets following the decisions of cartel offices and courts. In the regulatory regime for gas and electricity, a fragmented system of competition authorities on the federal (the Federal Cartel Office, BKartA) and Länder level has been set up. Both the BKartA and Länder cartel offices share responsibility for dealing with the abuse of dominant market power in energy production and supply. Because the energy sector has regional markets, the Länder cartel offices are responsible for cases in their geographical area. On both levels, the offices have to deal with an increasing number of cases. For electricity, apart from having the associations’ agreement, BKartA decisions have helped to reduce discriminatory practices by grid owners that have prevented transmission. The BKartA decided that although there are restricted capacities for transmission, a special capacity of the grid has to be

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kept open for transmission by third parties. In other cases, cartel offices act as mediators between new entrants and established grid owners to define the price to be paid for third party access. Both parties agreed to a preliminary price, which had to be confirmed by the BKartA. Additionally, Länder cartel offices decide on cases such as the legality of switching costs or the legality of grid owners’ refusal to conclude contracts for net access. However, this style of decision-making in the regulatory regime has been strongly criticised. Compared with regulatory agencies, cartel offices have only a partial regulatory function. They have little capacity – both in terms of staff and knowledge – to cope with energy regulatory issues. Furthermore, there is neither an immediate enforcement mechanism nor sufficient capacity to cope with complaints without delay (FAZ, 14 December 2000). Therefore, in August 2001 the BKartA established a new division as a decision chamber (Beschlußabteilung), staffed with seven civil servants. This division is entrusted with the issue of competition in the German electricity supply industry. The division deals with test cases and attempts to reduce the number of individual cases. Although the division lacks responsibility for direct enforcement, the BKartA hopes that initiating court procedures will serve as a deterrent. The president of the BKartA views this set up as a ‘new quality of regulation’ (SZ, 2 August 2001). The division closely co-operates with the task force of the BMWA (interview BKartA, August 2001). Apart from the division, in September 2000 a working group constituted by the BKartA and some Länder cartel offices was established to consider the general issues of energy regulation. Their main purpose is to organise coherent decision-making between the offices, to co-ordinate cases and to decide on test cases. In April 2001 the working group published a report defining principles on improper net access costs and general guidelines to measure obstructions to net access for the electricity sector (BKartA 2001). In general, the report highlights that the working group will increase the pressure on grid owners to stop incorrect behaviour. Deciding on test cases should help to increase the legal certainty within the sector. In sum, competition authorities play an active role in the regulatory regime for energy. Future institutional changes of the regulatory regime Because of the abovementioned criticism of the regulatory regime, which causes a lack of competition in both sectors, there were ongoing debates about replacing the AAs with a regulatory institution for the gas and the electricity sectors. The new entrants not only criticised the system of AA’s, they also criticised the latest set-up of the task force in the BMWA (see Coen, Chapter 4 this volume). The task force was interpreted as too late and too weak for a problem-solving approach. The new entrants thus desired legal grid regulation


33

and the establishment of a proper regulator (initiative Pro Wettbewerb, 12 March 2001). The new institutions in the BKartA and the BMWA were interpreted as the ‘nucleus’ of a new NRA (FTD, 1 August 2001). Apart from new entrants, the European Commission was especially sceptical of the German self-regulatory approach. The Commission argued in favour of regulated third party access and the establishment of a regulatory agency. With proposals to bring forward the liberalisation process, the Commission intends to push Germany, as the only European country without a regulator, to establish an energy regulator (FTD, 14 March 2001). Only the former incumbents were clearly in favour of the self-regulatory regime. As the initiators of this system, they interpreted the AAs as systems of private regulation, which enable companies to negotiate directly within a flexible and non-bureaucratic system (interview RWE, April 2000). They argued that regulatory agencies were always less optimal than self-regulatory solutions (interview Ruhrgas AG, April 2000; Engel 2002). Instead, they founded a new working group called the Negotiated Network Access Regime Agency (NARA) as a new ‘speaking tube’ for the system of negotiated third party access in electricity and gas. The group, founded by the associations which negotiate the AAs, intended to report on the self-regulatory system at both the national and international level. On the governmental side, the BMWA agreed that there were problems within the regulatory regime, and it therefore had set up the task force. However, it was still in favour of negotiated third party access. The government had for long referred to the traditionally ‘lean energy law’ and lighthanded governmental interventionism. However, especially in the case of negotiations for the AA 2 in the gas sectors, where it was very difficult to reach an agreement, the BMWA used the announcement that a regulator would be set up as a threat to bring the associations back to the negotiation table (FTD, 2 March 2001). The BMWA argued that the system of AA could only have a future if there were decreasing customer tariffs, transparent principles for net access and clear regulations to switch customers. The Energy Law authorised the ministry to set up legal grid regulation (Netzzugangsverordnung) for third party access: this is outlined in Article 6 (2) for the electricity sector and Article 6a (4) for the gas sector. The BMWA interpreted this clause as an ‘emergency break’. In 2004, the government and the BMWA published a draft of a new Energy Law, which suggested handing over regulatory responsibilities to an energy regulator. However, the draft does not yet specify the specific regulatory powers of this regulator. The regulator will have strong interference and control powers and will have to supervise the abuse of dominant positions (Eder and Wyl 2004). Whether the energy regulator will have ex ante or ex post regulatory responsibilities is still under debate. However, there are signs

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that the energy regulator will become an integrated part of the RegTP. In 2001, the BMWA had argued that the regulator ought to be installed under the roof of the BKartA (interview BMWA, March 2001). The Rail Sector The rail sector was long considered a natural monopoly with high ‘sunk costs’. However, with the aims of reducing state subsidies, enhancing productivity and increasing the sovereignty of consumers, states opened their rail sectors. The state nevertheless retained a strong influence on public service obligations. In general, this led to opening up the rail network to other competitors; it also led to the separation of network and services, and the reduction of state responsibilities. To create and support markets, new regulatory regimes were established, which will be explored for the British and German cases. The British regulatory regime in the railways as a system of ‘dual regulation’ In Great Britain, the rail sector was the last utility sector to be liberalised by the Conservative government. With high speed and intensity, a radical approach was taken to reform the sector. Before the rail reform, the sector was publicly owned, with British Rail (BR) as the incumbent. British Rail was vertically integrated, with a hierarchically organised body. The state was heavily involved in the sector: as a nationalised industry, BR was financed by the state and supervised by the Department of Transport (DoT). The government and the British Rail Board (BRB) – the management board of BR responsible for running the system – had a close relationship. Statutory frameworks had been set up to organise the relationship between BR and the DoT; however, they were only vaguely defined (Knill 2001a: 149). The government had wide discretion, which caused a ‘constant irritating stream of interventions’ on BR and delayed decisions, and which reduced the effectiveness and efficiency of the railways (Foster 1992: 84ff.). There was constant criticism of the British railways, that is of its operational inefficiency and high maintenance costs, its loss-making and its dependence on heavy subsidies. Beginning in 1979, the Conservative government, with a neo-liberal stance, spurred on debates to reform the railways (Knill 2001a: 160f.). For the government ‘the question was not so much whether to privatise BR, but how to do so’ (Hass-Klau 1998: 34). After first initiatives towards a rail reform in the 1980s, John Major’s government undertook radical changes. A White Paper was published in 1992 (DoT 1992) and, with the 1993 Railways Act, a rail reform was initiated with the core goal of splitting up BR. The separation of the rail track and services


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led to vertical and horizontal fragmentations. The following private bodies were created: ●

●

●

●

Railtrack (RT), constituted as a separate track authority in 1994 and privatised in 1996, is responsible for managing the infrastructure (network and stations), that is, train planning, signalling and the supply of access to tracks and stations. The rolling stock companies (ROSCOs) own the trains and lease them to private businesses. For passenger transport, 25 private train operating companies (TOCs) were set up. The TOCs are franchises. The private sector competes to buy the rights of operation. For freight and parcel business, freight operating companies (FOCs) with specific tasks – such as regional distributors or companies that transport from harbours or airports – were established and sold to the private sector.

To regulate this complex and fragmented system of privatised bodies, interlinked by contractual relationships, there is not just one regulator, as in the case of telecommunications and energy. Instead, two regulatory bodies were created. They have to regulate the private market but, as a second sectorspecific function, they also subsidise unprofitable passenger services. Especially because of this second regulatory function, the regime is describe as ‘radically different from … other utility regulators’. This reflects the ‘considerable regulatory complexity’ of the rail sector (Prosser 1997: 185ff.). As a primary regulatory body, the Office of Rail Regulation (ORR) was institutionalised. This institution functions similarly to regulators such as OFTEL or OFGEM. A director-general is the head of the regulator. The overall task of the agency is to regulate the newly created market in the rail sector: this includes promoting competition and preventing the abuse of dominant positions. To do so, first, the ORR grants and enforces licences to operate trains. Second, the regulator defines and monitors access and charging on the network. For example, the ORR approves the track access charges, which have to be paid to Railtrack by the operators. Third, the regulator supervises the contracts negotiated between TOCs and RT. Additionally, the ORR monitors the performance of RT. The second regulator was the Office of Rail Passenger Franchising (OPRAF), established as a franchise authority to negotiate and monitor the franchise contracts with the TOCs. The central characteristic of the rail sector is that, in most cases, it is not a profitable entity. Therefore, TOCs are dependent on state subsidies. The central goal of OPRAF is to distribute public

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funding as subsidies and to ensure the quality of the rail service at the lowest possible cost (see Bristow et al. 1998). The Office of Rail Passenger Franchising has to put franchises up for bidding. Franchising contracts are concluded with the highest bidder. These contracts contain the subsidies granted and define performance standards to ensure that the subsidies are invested for effective, efficient and safe rail services. Additionally, OPRAF regulates the consumer prices: the regulator controls and monitors a variety of standard and discount tickets to prevent TOCs from increasing their rising profit by increasing fares. While OPRAF supervises the economic performance of the TOCs and enhances marketisation between the TOCs via yardstick competition, the Rail Inspectorate (RI) has taken over responsibilities to ensure the safety of the railways. The Transport Act 2000 and the establishment of the Strategic Rail Authority (SRA) The Railways Act 1993 took a radical stance and caused changes which went beyond regulatory reforms in other utility sectors in Britain. With the ORR and OPRAF the reform had a unique regime of dual regulation, which went ‘against the grain’ of the general trends in other utility sectors. However, the regime had problems successfully regulating the sector: a central concern was the imbalance between Railtrack and the TOCs. Contracts were not carefully enough negotiated (interview SRA, November 1999). Another challenge was the confusion between ORR and OPRAF within the system of ‘dual regulation’ (ORR 1997). For example, both institutions had overlapping responsibilities in consumer protection. There were still unsatisfactory outcomes, for example, with train delays, under-investment in the net and a high rate of accidents. The performance of the whole liberalised rail system was described as ‘rather poor’ (Héritier 1998: 15f.). The Labour government, which came to power in 1997, started an investigation of the sector and developed the regulatory regime further. First plans to renationalise the sector were stopped, because it would have been too expensive to reverse privatisation. Instead, with a reform of the rail law, the fundamental weaknesses of the sector were to be overcome. A White Paper was published with the goal of creating a safe, modern and high-quality transport system by establishing a more effective regulatory framework . Some of the main flaws were considered to be the lack of long-term strategic planning, the confusion of responsibilities between ORR and OPRAF, and the lack of a consumer focus. The most prominent proposal was to reform the regulatory regime by setting up a Strategic Rail Authority (SRA), an institution described as a ‘vehicle for long-term commitment by Government to the railways’ (ORR 1997). However, the SRA views its own creation as offering ‘a second chance


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to do things better after we have learnt from failures of the past’ (interview SRA, November 1999). In 2000, with a new Transport Act, the SRA was established. As a ‘multiparty merger’, it took over other institutions from authorities still in operation as well as individual responsibilities (SRA 2000: 15). Most importantly, OPRAF was abolished and the SRA took over its responsibilities. In contrast to the short-term oriented regulatory style of OPRAF, the SRA decides with reference to long-term perspectives. The SRA will become a strategic investor, with responsibilities to negotiate passenger rail franchises and to enforce consumer protection. Additionally, the SRA received responsibilities from other institutions within the regulatory regime. The SRA took over some responsibilities from the Department of Environment, Transport and Regions (DETR): the allocation of freight grants and responsibilities for statistics. Responsibility for safety control was shifted from Railtrack to the SRA. As a further task, the SRA is the new central body for consumer protection; that is why responsibilities for this issue formerly held by the ORR were shifted to the SRA. Additionally, the SRA took over the British Rail Board (BRB). As a consequence of the creation of the SRA, the ORR was reformed, too. From February 2001, the regulator gained new responsibilities, but lost others. The core goal was to enhance the ORR’s role as an economic regulator and to optimise ORR and SRA co-ordination (interview SRA, November 1999). With the Transport Act, ORR gained new responsibilities to monitor closely Railtrack and the ROSCOs. The ORR also lost responsibilities, some, such as consumer protection, being transferred to the SRA and the DETR. In sum, the Transport Act of 2000 led to a major shift within the regulatory regime of the British railways. The dual regulatory regime was reorganised. New responsibilities were given to the regime, especially to the SRA, and functions were newly distributed between institutions. The role of the DETR in the rail regulatory regime Before liberalisation, the British Rail Board, which steered BR, was under the close supervision of the DoT, which had powers of intervention. Although there was separation between general policy and the day-to-day administration by the BRB – which was clear in theory and defined by the ministry, the Secretary of State and politicians – there was intense political involvement. For example, when ministers tried to reduce the investment in the railways, endless discussions delayed the decision-making (see Foster 1992: 83). With regulatory reform, the government continued to set the general railways policy. The rail sector is currently very politicised; ministers still have a hand in the regulatory process and the day-to-day decisions. With the Transport Act 2000, the relationship of the ORR and the SRA to

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the DETR changed. The ORR is formally independent of the government; however, there is governmental intervention. The ministry still plays a central role, as it issues the licences to Railtrack. Additionally, the ORR is allowed to close passenger services as long as the ministry agrees (Prosser 1997: 186f.). The ORR admits that it ‘cannot be completely independent of the views of the government of the day’ (interview ORR, November 1999). In contrast, OPRAF, and now the SRA, are even more closely supervised by the DETR. Article 206 of the Transport Act 2000 explicitly determines that the DETR is allowed to direct the SRA and guide its strategies. The ministry admits that it ‘gives a firm steer’, for example, on the renegotiations of franchises, to ensure that performance improves (interview DETR, January 2001). The role of competition authorities in the regime Within the regulatory regime in the railways, the Office of Fair Trading (OFT) and the Competition Commission (CC), which was the Monopolies and Mergers Commission (MMC) until 2000 are both involved. In cases where the TOCs or companies such as Railtrack do not agree with the decisions of the ORR, it is possible to appeal to the CC for a final decision. As Prosser outlines, the sector always has the ‘potential involvement’ of the MMC (Prosser 1997: 187). With respect to relations between OFGEM and the OFT, the Competition Act 1998 changed the responsibilities of the two institutions in respect of anticompetitive behaviour or the abuse of dominant position. Like OFTEL and OFGEM, ORR and OFT set up a concurrent working party (CWP) to co-ordinate the decision-making between the two institutions. The institution with the most sectoral knowledge and most recent experience has to decide on the case. As a consequence, the ORR is more involved in cases on competition issues related to the rail sector, and the involvement of the OFT has decreased. The German rail regime: from a supervisory to a regulatory agency? Before the liberalisation of the German rail sector, the Deutsche Bundesbahn (DBB), as a publicly owned monopoly, had the status of a public authority. Article 87 (1) of the Basic Law defined the railways as part of the federal administration. Therefore, the majority of ‘sovereign functions’ (hoheitliche Funktionen) were carried out by the DBB itself. State supervision incorporated two institutions: the Federal Ministry of Transport (Ministerium für Verkehr, BMV, later Ministerium für Verkehr, Bauen und Wohnen, BMVBW) and the Federal Cartel Office (BKartA). The main competency of the BMV focused on strategic policies as well as detailed operational issues of the DBB: for example, tariffs, personnel management or budgetary plans. Additionally, the Länder had supervisory functions regarding regional planning and technical issues (see Kühlwetter 1996: 15). As a


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consequence, ‘there were simply too many actors ready and able to interfere in the railway’s commercial decisions’ (Teutsch 2001: 290). After 30 years of debates on general principles, in 1994 a rail reform was initiated to reduce the ‘structural overload’ of the state (Lehmkuhl 1996). The state monopoly of the Deutsche Bundesbahn led to unsatisfactory results, for example, low productivity, rising annual deficits and increasing debts, with the ongoing threat of bankruptcy (Héritier 1998: 8). Therefore, the main goal of the reform was to stop further losses in revenues and to strengthen the railways by reorganising the public monopoly. The European railways Directive 91/440/EC pushed forward the German reform. On the national level, the German unification and the desire to merge the Deutsche Bundesbahn and the Eastern German Deutsche Reichsbahn increased the pressure for reforms. Therefore, these ‘parallel discussions’ on the national and European level ‘facilitated building a consensus over the national reform plan’ (Teutsch 2001: 302ff.). The key measures of the new Rail Law (Allgemeines Eisenbahngesetz, AEG) were as follows: ●

●

●

Transformation of two state railways into one joint stock company. The West German Deutsche Bundesbahn and the East German Deutsche Reichsbahn were merged and transformed into the Deutsche Bundesbahn AG (DBAG), a unified joint-stock company under private law, while the debt of the two former state companies were taken over by the federal government. Separation of track/net and infrastructure from operational units. At the European level, the option of completely separating the infrastructure and operation was discussed. However, the DBAG remained vertically integrated and had to separate its functions into sections such as track, freight and passenger transport services. In 1999 these sections were transformed into independent companies under the holding of the DBAG. Non-discriminatory third party access to the rail network. As a consequence of the liberalisation and the opening of the market, nonstate companies now have to be given access to the net from DB Net AG, the infrastructure branch of the DBAG. With this rail law, operators now pay for the cost of using the track. The conditions have to be negotiated in a self-regulatory process.

With the formal privatisation and the establishment of the DBAG, all sovereign functions formerly carried out by the DBB had to be separated and transferred to new institutions. A new regulatory regime had to be developed. Apart from the ministry (the BMVBW) and the Federal Cartel Office

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(BKartA), a new agency was set up, the Federal Railway Agency (Eisenbahnbundesamt, EBA). EBA All sovereign functions were transferred to the EBA, which was established in 1994. Defined as an administrative agency, the EBA is responsible for the ‘supervision’ and ‘approval’ in the rail sector (Aufsicht und Genehmigung). Its main task focuses on technical issues such as the responsibility for licensing railway companies, control of the safety of technical equipment or issues related to infrastructure planning and financing (Holst 1997: 88). As the state remains involved in financing the infrastructure of the railways, the EBA awards and supervises grants for services on the federal level. For financing services on the regional level, responsibilities for distributing subsidies have been taken over by regional and local authorities. However, the EBA is not a ‘mainstream’ regulatory agency at all. Lawyers and practitioners argue that ‘the term “regulation” is unknown to the German rail law’ (Kühlwetter 1997: 94). Instead of setting up a rail regulator with price regulatory and other extensive responsibilities – for example, to enforce third party access – a rail authority was founded, with weak responsibilities, to develop competition. The other responsibilities have been left in the hands of the DBAG, which is therefore often a ‘player as well as referee in one person’ (Holst 1997: 89). Thus, the EBA describes itself ‘not as a regulatory agency, but as a non-discrimination supervisory agency’ (interview EBA, August 2000). In general, the EBA is described as a low profiled ‘tame institution’ (see Kühlwetter 1997: 105). This is not only because of its work on technical supervisory functions, but also because of its weak responsibilities in combating the discriminatory behaviour of the DBAG. As the number of complaints before the EBA increased, small rail operators criticised the supervisory system for being too slow and lacking in transparency. They therefore have argued for further developing the regulatory regime, especially by extending the regulatory responsibilities of the EBA. The role of the BMVBW in the rail regulatory regime Before liberalisation, the German government was heavily involved in the rail sector; there was close co-operation between the ministry and the Deutsche Bundesbahn (Kühlwetter 1996: 15). With the rail reform, the role of the BMVBW changed. The new EBA took on a ‘hinge function’ (Scharnierfunktion), mediating between the BMVBW and the rail companies (Kühlwetter 1997: 105); consequently the impact of the BMVBW on the operational issues of the rail sector diminished. Instead, apart from the BMVBW’s core function – that is, distributing direct subsidies that reflect the overall responsibility of the government (Article 87e (4) GG) – the ministry received new oversight functions: as an administrative agency, the EBA has to be regulated by the


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ministry via supervision and directives. There is still no case-to-case intervention in the decision-making of the EBA, a fact that the EBA views as ‘surprising’ (interview EBA, August 2000). The role of the BKartA in the rail regime Because of the state monopoly, before liberalisation the Federal Cartel Office (BKartA) did not play a prominent role in the rail sector. Because of ‘regulations for controlled competition’ (kontrollierte Wettbewerbsordnung) (see Aberle and Brenner 1996: 37; Lehmkuhl 1996: 72), attempts were rarely made to prevent anticompetitive behaviour. In parallel with the rail reform, the competition law (Cartel Law, GWB) was amended. With the sixth reform of competition law, the BKartA was made responsible for merger control, and for preventing anti-competitive practices in the rail sector. The BKartA is now able to take sector-specific decisions for the rail sector, and it thus shares responsibility for net access with the EBA. If negotiations between competitors in the rail sector fail, the operators have two options: in cases referring to technical issues, they call the EBA (Article 14 (5) AEG); in cases dealing more with commercial issues, the complaint is handed over to the BKartA. These responsibilities are shared because of an informal arrangement from 1998 between the presidents of the EBA and BKartA. It aims to safeguard effective co-operation and to prevent ‘regulatory shopping’. Both institutions inform each other informally about cases given to them and ask each other for advice on cases that include technical as well as commercial issues (interview BKartA, August 2000). The EBA and BKartA have a ‘good relationship’ and they co-operate closely (interviews BKartA and EBA, August 2000). Since 1998, BKartA has become more important. The number of complaints about the DBAG – mainly on the abuse of dominant position, regarding such things as the use of rail track, the access to repairing states or the blocking of locomotives – increased dramatically and led to a work overload for BKartA (interview BKartA, August 2000). The most prominent case brought before BKartA concerned the track prices paid to DB Net AG to accessing the track (SZ 3 August 2000). Competitors of DBAG criticised the two-level track price system of DB Net AG, which was said to favour larger customers such as DB Cargo AG or DB Regio AG and thus to keep competitors out of the market (see Ewers and Ilgmann 2000). After informal negotiations between BKartA, the DBAG and the plaintiffs, an informal agreement led to the development of a non-discriminatory, one-level track-system by the DBAG (interview BKartA, August 2000). In April 2001 a new system was implemented, which reduced track prices for small users of the DBAG net. For BKartA, this case highlights how successfully the office

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uses its regulatory responsibilities to bring about effective competition in the rail sector. The latest developments are that the government has introduced legislation to reform the ‘supervisory regime’ by enhancing the regulatory responsibilities of the EBA. First, this plan was caused by the growing intra-modal competition on personnel transport at regional level and freight transport at national as well as international levels (Die Zeit, 13 July 2000; FAZ, 19 September 2000). Although the number of competitors has only increased slightly, and the internationalisation of the sector has only emerged slowly, there has been a shift from co-operation towards more competition. As a consequence, as mentioned above, more cases are being brought before the EBA and BKartA. Both institutions are overloaded with work, which has led to criticism of their slow decision-making. Secondly, there is EU pressure to set up a rail regulator (FT, 23 November 2000). The EU initiated new policies to revitalise the European railways system by opening the railways, separating essential functions and, as a goal to be reached by 2008, establishing free and equal access to the European rail track. To do so, an independent national regulator has to be established for licensing, decisions and track prices. Therefore, with a second rail reform, the government and the BMVBW plans further developments in the regulatory regime. One central proposal is to extend the regulatory responsibilities of the EBA to a rail regulator. The Pällmann commission, which published a report on the future of German infrastructure finance in September 2000, argued in favour of setting up a ‘special regulatory body in the organisation of the BMVBW’ (BMVBW 2000b). In March 2000 a new transport minister took over office. He proposed reforming the vertically integrated DBAG and splitting track from operations (FTD, 12 March 2001). However, since the DBAG opposed this idea, it was agreed to leave the track with the DBAG, but to establish a rail regulator (FAZ, 29 August 2000). As a consequence, the EBA will receive new responsibilities and will become a regulatory agency (‘track agency’) (see FTD, 8 September 2000; SZ, 7 March 2001). A draft proposal to amend the Rail Law (Allgemeines Eisenbahngesetz, AEG) in order to transfer new regulatory functions to the EBA was accepted by the government in April 2000. The EBA will receive new ex ante regulatory responsibilities with the right to initiate its own inquiries to stop discriminatory behaviour (the new Article 14 (3a) AEG). Additionally, the EBA will have the right to sanction rail companies that refuse to give access to information. With the amendment, the regulatory regime will ensure fair and non-discriminatory third party access. The new regulator will be installed in 2005.


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Most actors are in favour of this regulatory reform. The rail reform is supported by the EBA, as it will reduce its ‘toothlessness’. The BKartA questions the need for a sector-specific regulatory body for the rail sector and the extension of EBA responsibilities. Since the reform does not enhance the responsibilities of the BKartA, the office fears the sectoralisation of competition law and increased administrative costs because of the dual authorities. The DBAG is not in favour of the reform either. The company fears over-regulation and argues that instead of setting up a strong rail regulator the cartel office has sufficient regulatory responsibilities to prevent discriminatory behaviour (interview train operator, August 2000). However, to keep rail track within the company, the DBAG agreed that there was a need to establish sector-specific regulatory procedures.

TOWARDS AN ANGLO-GERMAN COMPARISON OF DEVELOPMENTS IN REGULATORY REGIMES From a comparative administrative research perspective, this chapter has analysed institutional dynamics of regulatory regimes for the sectors of telecommunications, energy and rail in Britain and Germany. In the second section we outlined a basic structure of regulatory regimes containing a ministry, a competition authority and a sector-specific regulatory agency, and it formulated three lines of inquiry. The third section provided six case studies on the analysis of the changes of the institutional design of regulatory regimes. In this section we give an account of the findings of the case studies and in the next some general conclusions. To explore the institutional dynamics of regulatory regimes, we will point to the three lines of inquiry: (1) the ‘regulatory agency dominance’; (2) ‘ministerial interference’; and (3) ‘competition authority predominance’. This will allow us to point to two comparative perspectives: First, with a crosssector perspective we will explore similarities and converging trends in the sector-dynamics of the institutional designs of the regulatory regimes. The starting point is to explore similarities and converging trends for British and German cases. Secondly, on the basis of the outcomes of the cross-sector comparison, the focus is on a cross-country comparison between Britain and Germany and draws some general conclusions. Britain Britain was always viewed as the forerunner in utility regulation. Comparing the regulatory regimes, we now find strong similarities between them. All three sectors have the same style of regulatory agency dominance (line 1). The

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regulatory agency model is found in all the three sectors: telecommunications (OFCOM), energy (OFGEM, as well as its predecessors, OFFER and OFGAS) and rail (ORR). The first British utility regulator had a modelling function: the telecommunications sector, with OFTEL, was taken as a general model and a ‘blueprint for all subsequent regulators’ (Helm 1994: 22). Although they have a similar starting point, British agencies followed different paths of institutional change, as analysed in previous sections. Regulators were merged or responsibilities extended; however, there is no sign of abolishing regulatory agencies as such. This holds true for telecommunications, where OFTEL was merged into OFCOM in 2003. In energy, originally separated units – OFGAS and OFFER – were merged into the single regulator, OFGEM. After working as two separate units for more than a decade, this was a reaction to the increasing convergence of the two energy markets. In the rail sector, the dual system of regulators is still in place. However, since the design of the ORR was retained, by setting up the Strategic Rail Authority, powers were shifted from the ORR to the SRA. In sum, these developments among the regulators did not lead to the fading out but to the stabilisation of the existing regulatory regimes, with sector-specific utility regulators as the core instrument. Analysing the ministerial interference (line 2), the role of ministries in the regime and ministerial interference in the decision-making of regulatory agencies was investigated. The case studies reveal that ministries play an increasingly dominant role in all three sectors. An analysis of the formal relationship between ministries and regulators shows that there is no clear separation of responsibilities. Ministries keep responsibilities or ‘reverse powers’ to participate in the day-to-day regulatory decision-making. The DTI, for telecommunications and energy, and the DETR, for rail, are involved in decision-making on operative functions, as in the case of licensing. Even after changes in the regulatory regimes, such as the establishment of OFGEM, these responsibilities have been retained. By extending the regulation to social and environmental objectives, political interference in regulatory decision-making even increased, as was evident, for example, when the DTI guided OFGEM on such objectives. Vice versa, regulators and their director-generals give policy advice to ministries. This can be interpreted as a sign of their independence (Hogwood 1990: 602); however, more importantly, it shows that the ministries and regulators have intertwined responsibilities. With respect to the informal relationship of ministries and regulatory agencies, ministries claim to be cautious about openly interfering with regulatory decision-making. Ministries shadow the decisions of the regulators, and regulators are aware of the views of the actual government. As a consequence, there is a tendency for ministries to subtly interfere in regulatory agency decision-making.


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To sum up, for the case of regulatory regimes in Britain, in all three sectors we could find examples of ministerial interference. Within the regulatory regime, ministries played, and increasingly play, a dominant role. Responsibilities are overlapping: this leads to close co-operation and dense intra-organisational relationships. Developments in the regimes have not led to a reduction in the amount of ministerial day-to-day involvement. The case of utility regulation reveals a general tendency: British ministries are reluctant to give up control (Loughlin and Scott 1997). However, by extending the focus to economic as well as consumer protection, sectors are politicised and the ministerial influence is consequently enhanced. Therefore, ministries are ‘crucial actors in regulation’ (Hansard Society 1996: 63), and there is a threat of further politicisation of the British regulatory regime (see Wilks 2001). Pointing to the third issue, that is the competition authority predominance (line 3), in the regulatory regimes, it was claimed that they play an important role on competition issues in the regime, share responsibilities with regulators and that they are therefore extremely co-operative. The case studies on British telecommunications, energy and rail offer a homogeneous picture of the role of competition authorities within the regimes. For issues on general competition, such as anti-competitive behaviour and the abuse of dominant position, the role of OFT in the utilities changed. With the 1998 Competition Act, the responsibilities of the OFT on competition issues in the utility sectors increased, but with the concurrency rules and the CWP, the OFT has limited implementation responsibilities in the regulatory regimes: the regulatory agencies, OFCOM, OFGEM and ORR, took over decisionmaking on competition issues. That is why, for regulatory agencies, there has been a shift from sector-specific regulation to ‘competition regulation’. However, the OFT is not out of the game: within the CWP, the OFT coordinates and debates with the regulators on general issues of competition policy, and it influences how cases are dealt with. In sum, within the British regulatory regime, the OFT co-operates with regulators, but has a reduced role in the regime. The British competition authority has become less important within the regime. Germany At first glance, the German utility regulatory regimes – and especially their sector-specific regulatory institutions – show heterogeneous regulatory designs. However, comparing the regimes on the basis of the above-mentioned lines of inquiry reveals a mixed picture. Starting with regulatory agency dominance (line 1), the three German utility sectors now show up as heterogeneous institutions. With the RegTP, in telecommunications there is only one regulatory agency being set up. In

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contrast to the RegTP, the EBA is a traditional administrative agency with supervisory responsibilities for the rail sector. In the energy sector, for electricity and gas, systems of regulated self-regulation were introduced with associations’ agreements. From a comparative perspective, the regulatory regimes have dissimilar institutional designs. Thus far, there have been differences between the three sectors. However, as outlined in the case studies, the institutional developments in the regulatory institutions show institutional changes which will lead to a converging trend. German regulatory regimes tend to set up regulatory agencies. Since being set up five years ago, the telecommunications regulator, RegTP, has been stable, and its powers were further enhanced by the Telecoms Act 2004. The institutional design of the EBA, the supervisory agency for the rail sector, will soon be modified. A second rail reform will enhance the responsibilities of the EBA: it will receive more economic regulatory responsibilities. In the energy sector, a regulatory body as part of the RegTP will being established under the new Energy Law in 2005. In sum, there are at times differences between German sector-specific regulatory institutions. However, in a medium-term perspective, there will be regulatory institutions in the energy and rail sectors parallel to the telecoms sector, too. With ministerial interference (line 2), the clear separation of responsibilities between ministries and regulators has been pointed out, as has the fact that there is ministerial interference in regulatory decision-making. In the case of German regulatory regimes, depending on the design of the existing sectorspecific regulatory institutions, ministries take over various responsibilities and effect regulatory decision-making to differing degrees. Therefore, the regimes appear to be quite mixed. In the telecommunications regime, the RegTP and the BMWA have clear-cut responsibilities. It is rare that the BMWA formally interferes in RegTP decision-making, but they often interfere informally. In the energy sector, with the self-regulatory regime of associations’ agreements, the BMWA plays a crucial role. In general, the ministry has claimed not to be involved with the self-regulatory regime. There is evidence, however, that the BMWA informally influences the negotiations of the AAs – for example, in the selection of involved actors or the contents. However, by institutionalising the task force the BMWA has enhanced its impact on the sector. In contrast to the telecoms and energy sectors, the ministry does not strongly influence the rail sector: as an administrative agency, the EBA is supervised by the BMVBW; however, the EBA claims that the ministry is not deeply involved in the EBA’s decision-making. With the second rail reform and extended responsibilities for the EBA, the ministerial interest in regulatory decision-making may increase.


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So, to conclude, the general tendency of ministerial interference holds for German regulatory regimes. Ministries play an important role in regulatory regimes. With respect to the third issue – that is, regarding the competition authority predominance (line 3) – in the German regulatory regime the role of competition authorities was analysed, specifically the BKartA in the regimes. The role of the BKartA differs for the three sectors according to the design of the sector-specific regulatory institution. In the energy sector, the BKartA plays the most prominent role: because it is a self-regulatory regime, with the associations’ agreements an increasing number of cases are brought before the office. The BKartA has stepped in and established a new branch with a decision-making chamber for energy cases. Additionally, in co-operation with Länder cartel offices, a working group was founded to cope with the weaknesses of the self-regulatory regime and to reduce discriminatory practices. In the rail sector, on the basis of an informal agreement the BKartA and the EBA share responsibilities on competition issues. With the second rail reform, the EBA’s regulatory role will be enhanced. This will reduce the impact of the BKartA within the regime; however, it will still play some role in decision-making. As a general rule, the stronger the sector-specific institutions, the greater the reduction in the role of the BKartA. Regulation in the telecommunications sector shows that the RegTP is the dominating institution, while the BKartA has ‘reserve functions’. The BKartA uses these functions quite passively. As a consequence, the RegTP is the central institution for regulatory decisionmaking and, although there are internal administrative struggles, the BKartA keeps quiet in most cases. In sum, a general tendency among the German regulatory regimes is that the BKartA still plays – or in the telecoms sector, could play – a central role within the regimes. However, there might be changes in a medium-term perspective. If sector-specific regulators were established for energy and rail, as they have been for telecommunications, the predominance of the BKartA could be restricted and be as ‘quiet’ as in telecommunications. Converging Trends Comparing British and German Regulatory Regimes For the three lines of inquiry, it was revealed that since the establishment of the regimes, with regard to the three lines of inquiry, there have been overall converging trends among the regulatory regimes in Britain and partly converging trends in the regimes in Germany. In a last step, the extent to which there are converging trends in a cross-country perspective will be analysed. We compare the regulatory regimes in Britain and Germany to show

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similarities between the regulatory regimes and to draw some general conclusions. It is a demanding task to compare British and German regulatory regimes with respect to regulatory agency dominance. In Britain all three sectors have similar regulatory agency designs. Germany has opted for three dissimilar regulatory institutions. That is why there is no convergence in the design of the sector-specific regulatory institutions in the British and German regimes. As a conclusion, the overall trend is that the design of the sector-specific regulatory institutions differs. However, there are signs which indicate a mid-term convergence between the regulatory regimes in Britain and Germany. In Britain, regulatory agencies were being established from the beginning of the liberalisation process. In contrast, the overall trend regarding the implementation of regulatory agencies in Germany was the result of institutional developments in the regimes, leading to a ‘second reform wave’. In general, an Anglo-German comparison reveals that the regimes of nearly all the sector-specific regulatory institutions have undergone developments. Regulatory agencies were merged (as in the British energy sector), responsibilities where shifted between regulatory institutions (as in the British rail regulation and the responsibilities of SRA and ORR), or the responsibilities of sector-specific regulatory institutions were enhanced to create regulatory bodies (as in the German EBA). The German regulatory agency in telecommunications, the RegTP, remains an exception: even after the TKG 2004, there have only been minor changes in the institutional design thus far. With a comparative focus on cross-sector regulatory learning, in Britain the regulatory agency model stood as a ‘pioneer of change, especially that of OFTEL, established in 1984 as the first regulator. It [has] served as an example … both in Britain and in other European countries’ (Thatcher 1998: 121). In Germany, the debate about institutionalising regulatory agencies started later: originally, there was no direct cross-sector regulatory learning in the German utilities. For example, for the regulatory regime in the rail sector – the first sector to be liberalised, and this as late as 1994 – the design of the EBA was copied from one of the subordinated administrative agencies of the BMVBW. There were no debates about setting up a rail regulator. As a consequence, the EBA did not have any influence on the shape of the later established regulatory regimes in energy or telecoms: the self-regulatory regime in energy was established because of the traditional low degree of state involvement in the sector (see the section headed ‘The self-regulatory regime in Germany and the shift towards an electricity regulator’). The design of the RegTP was predominantly influenced by the design of the British OFTEL and the American Federal Communications Commission (FCC). It was not much influenced by national regulatory regimes such as the EBA (Böllhoff 2002).


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However, since the establishment of the RegTP, there have been indications of more national cross-sector learning. The design of the RegTP, as a highly proactive, powerful and thus visible institution (which is quite innovative for the German administrative tradition), influenced the transitional path of other regulatory regimes as a ‘second reform wave’. For the new design of the EBA, as a rail regulator, the RegTP model was not copied; but both the BMVBW and the EBA took the RegTP as a model when developing their own institutional design (see BMVBW 2000a). As a consequence, there have increasingly been similarities between EBA and RegTP, such as the new ex ante regulatory responsibilities or rights to sanction rail companies. For the energy sector, many of the intense debates about transforming the selfregulated regime into a regulated regime have referred to the design of the RegTP (see, for example, Wetzel, 18 January 2001). Thus, it is not a surprise that it was suggested to hand over the energy regulatory responsibilities to the RegTP creating a multi-utility regulator. For Britain as well as Germany it is clear that the regulatory agencies for telecommunications served as an example for regulatory learning. The institutional design of OFTEL was diffused to other utility sectors in Britain. In Germany the model of the RegTP has not been copied. However, other agencies have learned from telecommunications: the telecommunications model thus had an influence on the new design of the EBA, and energy regulation will be ‘brought in’ along the lines of the RegTP. Comparing the ministries interference in regulatory regimes in Britain and Germany (line 2), there are strong similarities between the countries. In Britain as well as Germany, politics plays a core role within regulatory regimes. Apart from the supervision and steering at arm’s length, there is a tendency for ministries to interfere in the decision-making of regulatory agencies, and not to remain independent. Britain and Germany took different paths towards change in developing their respective regimes. In Germany the ministry has constantly been involved informally: the responsibilities of the ministries and agencies are clear-cut and defined by law, and have not been modified by changes in government. In contrast, in Britain, after the Labour government came to power in 1997, the role of ministries changed. Former Conservative governments were predominantly concerned with economic regulation and short-term regulatory issues, and they viewed regulation as a ‘by-product’ of privatisation. Labour recognised utility regulation as a separate policy field and argued ‘to assert [in utility regulation] the primacy of strategic national or social interests over those of shareholders’ (Hain 1993: 23). As a consequence, most of the changes in regulatory regimes were initiated and implemented by the Labour government with a focus on social obligations (that is, consumer protection and environmental protection

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as a new goal of the Utilities Act 2000 in the Energy Sector) or in accordance with a long-term regulatory perspective (that is, with the establishment of the SRA to enhance the long-term planning capacity of the rail regulatory regime). A comparison of the competition authority predominance within regulatory regimes in Britain and Germany (line 3) reveals cross-country dissimilarities. In Germany, the BKartA plays a generally influential role within regulatory regimes. In contrast, the OFT now has less influence on the British regulatory regimes. The BKartA is still involved in all three regulatory regimes, however, there is a trend towards the ‘sector-specification of competition law’. Thus far, the BKartA has retained its responsibilities for issues of general competition law, especially in the rail and energy sector. However, in accordance with a medium-term perspective the BKartA may assume a reduced role in utility regulation. Similar to this development, the role of British OFT within the regimes has become less important: although the 1998 Competition Act increased the number of responsibilities given to the OFT that were related to competition regulation, regulatory agencies became ‘competition regulators’. The British case shows the clearly diminished role of competition authorities. Whether Germany will follow a similar path is still an open question. These findings support the conclusion of an Organisation for Economic Co-operation and Development (OECD) report on the future on the interaction between competition authorities and regulators: namely, ‘that there are few, if any, countries where that division [of responsibility] can be regarded as finally settled’ (OECD 1999: 8). Table 2.1 summarises the overall converging trends in Britain and Germany.

CONCLUSION As a general conclusion, we point to the following. First, it has been shown that none of the British and German utility regulatory regimes in telecommunications, energy and rail are static; they are all dynamic institutional settings. There are ongoing developments in all the regulatory regimes. To create and correct markets properly, regulatory regimes have to be modified to cope with the changing demands of the state. Thus, regulatory regimes in all three sectors undergo institutional changes, but with different degrees of intensity. Generally speaking, the changes do not lead to the demise or abolition of the existing regulatory regimes, but to the stabilisation of them. The case studies on British and German regulatory regimes show that there are no signs that regulation is being faded out.


Table 2.1

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Summary of converging trends in Britain and Germany

Lines of inquiry

Overall converging trend/GB

Overall converging trend/Germany

Cross-country comparison: GB/DT

Regulatory agency dominance (1)

Stabilisation of regulatory agencies

Mixed picture. Medium-term perspective: creation of EBA as a regulator; energy regulation by the RegTP

Short-term differences; medium-term convergence GB/DT

Ministerial interference (2)

Ministries interfere in regulatory decision-making and play a central role in regulatory regimes; increasing politicisation

Ministries play an important role in the regulatory regimes; general tendency of ministerial interference

Convergence GB/DT

Mixed picture. Central role of the BKartA in the regimes mediumterm perspective: depending on the new design of sector-specific institutions, the role of the BKartA might decrease

Differences GB/DT Mixed picture/ open future

Competition Increased authority competencies, predominance (3) but limited activity of OFT in the regime

Regulatory regimes are not ‘interim measures’ (Thatcher 1998: 125); that is why there are regulatory enhancement and stabilisation. Secondly, with respect to the basic structure for regulatory regimes, as developed here in the second section, it has been shown that regulatory regimes in Britain and Germany do not comply with one another along

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all three lines of inquiry: the cross-country comparison highlighted the importance of ministries for both regulatory regimes. Ministries only partly steer regulators, and they do so at arm’s length; that is why they do not have a generally ‘low interference role’. However, in contrast to the Anglo-German convergence on the role of ministries, there are differences in the roles of competition authorities. In both countries, competition authorities are part of the regulatory regime; however, their roles differ. In Germany, in general the BKartA plays a central role, while the British authority, the OFT, occupies a less important place in British regimes. A comparison of the sector-specific regulatory institutions shows that the British regulatory agencies are the core regulators established for all three regimes, whereas in Germany only the telecommunications sector has regimes that comply with the basic structure. While a regulatory institution will soon be set up for the German rail sector, in the energy sector the future of the selfregulatory system is still in doubt and it is not clear which changes will be made. However, with the establishment of a task force in the BMWA and the BKartA, the increasing institutionalisation of regulatory instruments is evident. The one exception concerns the self-regulatory systems of associations’ agreements. Thirdly, as a general account, this comparative administrative study has shown that there are converging trends, but still differences, between the regimes in Britain and Germany. The future will show the extent of further converging trends, regarding matters such as the establishment of regulatory agencies. As argued above, regulatory regimes are not static entities, but dynamic ones. These developments in the regimes may lead to unforeseen design changes and the further convergence of regulatory regimes.

3. Administrative costs of reforming utilities Michael W. Bauer It might not mean more regulation, but more regulatory activity in order to come to a decision. (Civil servant, Oftel, November 2001)

INTRODUCTION Recent reform of network utilities was largely promoted as boosting efficiency. There were basically two ways – more or less pronounced in public debate – for the privatisation and deregulation of state monopolies in the utilities to increase efficiency. First and foremost, the reforms were to lead to better organised markets, which would improve value for money and make goods and services cheaper for consumers (maximising economic efficiency). Secondly, unleashing the market forces and getting the state out of the business of business was also expected to reduce the public bill for sectoral governance, since the superior allocation capacity of the freed market would significantly reduce the need for public intervention (withering away the regulatory task) – or so the argument ran. This second part of the efficiency promise may have been somewhat more pronounced in the UK, but it was also an essential element of the political discourse of change (Wende) when the Christian-Democrats, under Helmut Kohl, came to power in the early 1980s. Has the reform in network utilities over the last ten years confirmed or disconfirmed the diminishing public burden proposition? And is it possible to come up with a systematic explanation of how and under which conditions sectoral administrative burdens, in the post-reform period, do materialise, migrate or cease to exist? As I will show for the network utilities in the United Kingdom and Germany public costs do not vanish – contrary to the predictions of normative theoretical accounts of liberalisation. Rather, as state intervention changes in character, administrative costs arise in different corners of the system. Regulatory change may well make the continued provision of common goods increasingly complex 53

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and challenging. The origins of administrative costs change, and their composition may indeed be different in different markets. Regulatory reform does not, however, mean that the bill for the taxpayer is automatically decreasing. Knowing more about administrative costs (ACs) of managing utility performance will help us to assess the consequences and interrelatedness of political choices and institutional settings. The term administrative costs will be specified in the next section; for the time being it can be conceived of as efforts of public authorities to manage a reformed utility regime. The economic benefits of network utilities (in terms of increasing market efficiency) may be beyond doubt, but the role of the state in providing a fair competition regime and guaranteeing certain levels of public services has not been rendered insignificant by privatisation/liberalisation. Indeed, although public costs have been slashed in certain areas, the reform processes have added new challenges and inflicted new administrative costs in others. It is crucial that we learn more about such ACs in this context, since it will help us more adequately to assess the new complexity of public tasks in the era of the emerging regulatory state – and in particular to assess the kinds of (new?) tasks our public administrations will have to engage in.

DEPENDENT VARIABLE: A DEFINITION OF ADMINISTRATIVE COSTS The notion of administrative costs carries some heavily negative connotations – particularly within the US-American literature. This chapter uses the term in a strictly neutral sense, referring to administrative efforts or burdens. As a working definition, I suggest conceiving of administrative costs, that is, our dependent variable, as efforts of public authorities to manage a reformed utility regime in terms of enduring ‘hardware’ (for example, personnel, new institutions) and ‘software’ (legislation, directives, judicial review). I will refer to such sectoral administrative burdens as the administrative costs of utility reform or just ACs. Administrative costs are to be carefully distinguished from compliance costs, that is, the costs of the industry to comply with regulation (Hood and Scott 2000: 20) which are not part of the present analysis, and operational costs, which are actually included in my definition of ACs but usually refer only to the costs of running the regulatory offices.

INDEPENDENT VARIABLES, THEORIES AND HYPOTHESES This analysis highlights in particular three factors thought systematically to

Administrative costs of reforming utilities

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condition ACs in the post-reform period. These factors represent the administrative burdens in the post-reform phase to (1) sustain competitive but fair markets, (2) set incentives for private actors to supply a certain level of public service, judged politically desirable, and (3) co-ordinate public authorities in the daily business of providing (1) and (2). Each of these factors can be based upon a theory, thus allowing the empirical investigation to be ordered and falsifiable hypotheses to be developed. Market Sustaining and the Normative Theory of Regulatory Change At its simplest, the normative theory of regulatory change suggests that the level of regulation depends on the quality of the market. A truly competitive market would not need any regulatory coverage from the side of the state at all. As the utilities go from monopolies to competition (see Table 3.1), the regulatory tasks – and thus administrative costs – of public authorities should therefore whither away. While the argumentative thrust of this theory is to be taken seriously, one may, on empirical grounds, doubt whether 100 per cent competition can be reached in the utilities and whether even the emerging competitive segments of the market can do without the state provision of a reliable competition regime. Table 3.1

Stages model of administrative costs development

Stage 1 – Pre-reform Medium ACs

Stage 2 – Ongoing reform High ACs

Stage 3 – Post-reform Low ACs

Monopoly

Monopoly with competition

Competition

Source: Based on Coen and Doyle (2000a).

The first hypothesis that contrasts with the normative regulation theory is thus that administrative costs, in terms of designing economic regulation and controlling compliance, do not fade away as regulatory reform approaches ‘stage 3’, that is, satisfactory competition. The definition of sub-segments of the market, the evaluation of technological change and the task of guaranteeing a level playing field may reduce and transform the state’s regulatory activity. However, it does not eliminate it (market sustaining hypothesis). Incentivisation and the Principal–Agent Theory Even after privatisation and deregulation, the continuing provision of public services – at comparable levels to those prior to regulatory reform – is usually

56


required. Where the desired level of public services (affordability, accessibility, and so on) is not the natural outcome of the unregulated market interaction, state authorities may wish to set the right incentives to make private actors deliver. In this process of setting incentives, monitoring private delivery and, if necessary, improving the prescriptive and/or supervisory mechanisms, state authorities face the problems of incomplete contracting. As in classical principal–agent interactions, agents have to be made to reveal as much of their privately held information as possible, so that the principal is able to adapt the terms of the contract. For the phenomenon under investigation here, this means that monitoring and information-gathering costs are bound to remain with the state. The second hypothesis thus states that in the post-reform situation, non-economic (that is, public interest) goals are to be pursued by actors who are now largely autonomous. In order to reach certain public service goals, state actors have to set incentives accordingly. At the same time, they need sufficient informational and monitoring capacities. The greater the gap between what a particular market would deliver if left to itself and the politically preferred level of public services, the greater the ACs to rectify outputs (incentivisation hypothesis). Administrative Co-ordination and the Theory of Bureaucratic Politics Market sustaining and incentivisation need to be carefully implemented by, and co-ordinated among, the public authorities in charge. At the same time, on the basis of theories of bureaucratic politics, we can assume that these public authorities are supposed to seek to enhance, or at least to stabilise, their own role within the regulatory framework. Therefore, the third hypothesis suggests that the more dispersed regulatory authority becomes (ministries, regulators, competition authorities), the higher the probability of administrative infighting over power and competences (Table 3.2 and Figure 3.1). Such co-ordination problems raise ACs (co-ordination hypothesis).1 The composition of ACs varies across sectors and probably also across countries. However, it is expected that, with the help of the three independent variables, it will be possible to explain the administrative cost scenarios in telecommunications, electricity and railways.

UK TELECOMMUNICATIONS The transformation of the UK’s telecommunications sector started back in 1969 when the post office became a public corporation. In 1981 British Telecom (BT) was separated from the post office, and with the 1984 Telecommunication Act, 51 per cent of its shares were sold to private

Table 3.2 Three origins of post-reform administrative costs Incentivisation

Co-ordination

Problem

According to the normative theory of regulatory change, regulatory activity is to fade away as markets become more competitive. What we see, however, is that demonopolisation by itself is not sufficient to guarantee fair and sustainable competition

Public service goals, in so far as they cannot be delivered by the market, have to be agreed upon; their exact nature has to be specified; mechanisms for providing them through private actors have to be designed, as do monitoring instruments

Market sustaining and incentivisation need to be carefully co-ordinated by various public authorities who seek to enhance or at least stabilise their own role within the regulatory framework

Theory

Normative theory of regulatory change

Principal–agent theory

Bureaucratic politics

Proposition

(Ex negativo) in terms of designing economic regulation and controlling compliance, administrative costs do not whither away as regulatory reform approaches satisfactory competition. The definition of sub-segments of the market, the evaluation of technological

In the post-reform situation, public-interest goals are to be pursued by actors who are now largely autonomous. In order to reach that goal, state actors have to set incentives. At the same time, they need sufficient informational and monitoring capacities. The greater the gap

The more dispersed regulatory authority becomes (ministries, regulators, competition authorities), the higher the probability of administrative infighting over power and competences. Such co-ordination problems raise ACs Continued overleaf

57

Market sustaining

Table 3.2

(continued)

58

Market sustaining

Incentivisation

Proposition

change and the task of guaranteeing a level playing field and fair competition transform the state’s regulatory activity. It does not eliminate it

between what a particular market would deliver if left to itself and the politically preferred level of public services, the greater the ACs needed to rectify outputs

Expectations as regards the utilities

In predicting declining ACs, the normative theory has a strong point if the one-dimensional change from a ‘public monopoly’ to a ‘competitive market’ is the focus. The transformation of the utilities, however, is multidimensional: competition starts emerging only in segments of the market. This means that public authorities may still have to engage in defining borderlines. There are also the costs of making industry-related

The liberalised utilities markets cannot be counted on to provide public services if the provision collides with the efficiencyfocused logic of market interaction. The gap has to be filled by redistributive policies. Setting the right incentives and monitoring compliance (and eventually punishing defectors) are new areas of state activity in the reformed network utilities. ACs in this area should increase, and it is unlikely to decrease as long as the political

Co-ordination

Regulatory change is characterised by the establishment of sectoral regulators. As the regulatory regimes mature, the new players attempt to consolidate their positions – not least in regard to their working relations with ministries, general competition authorities, supranational players and sometimes even with sectoral co-regulators. In line with a bureaucratic politics perspective, power struggles are to be expected. The more

Empirical focus/indicators

59

information available to all potential players. As a consequence suitable institutions have to be sustained

preferences for certain levels of public services remain the same

complicated the regulatory set-up, the more challenging efficient public regulatory co-ordination becomes

– Development of competition within the market (number of participants) – Level of economic regulation – Competition cases – Increase of regulatory staff – Monitoring and informationgathering efforts related to economic regulation – Running institutions that make industry-related information accessible and transparent

– Obligations for public service provision in legislation and statutory rules – Institutionalisation of social consultation – Increase of public service related staff – Monitoring and informationgathering efforts related to public service tasks

– Number of regulatory authorities involved – Conflicting regulatory strategies – Migration of competences and regulatory staff

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Level of AC (a) (b)

(c) ?

(d) ?

Time Monopoly

Perfect competition

Note: (a) regulating the state monopoly; (b) sustaining emerging markets; (c) incentivising and monitoring the delivery of public services by private actors; (d) co-ordinating public regulatory action.

Figure 3.1

Visualisation of post-reform administrative costs development

investors. The Telecommunication Act also established OFTEL, the first sectoral regulatory authority of its kind. BT was privatised intact, that is, as a vertically integrated network operator and service provider. As a result, the government adopted a semi-protective duopoly policy, which, until 1990, allowed only one other network operator, Mercury, to compete with BT. However, after 1991 the network operation market was gradually opened, other service providers were allowed, and the rest of the government’s BT shares were sold to private investors. Market Sustaining The fact that UK public authorities can look back at 20 years of experience in regulating a liberalised utility, together with the fact that telecommunications came to be a market characterised by astonishing innovations and extraordinary growth rates, raises expectations that the theoretical predictions of diminishing ACs should – if anywhere – be validated here. And, indeed, the quick rise in the number of competitors and the success of the price-capping formula, retail price index minus X (RPI–X), make market sustaining appear as an effortless task (see OFTEL’s annual reports). Despite evidence that economic regulation, in terms of market creation, has indeed lost importance, the regulatory business has, however, not become easier for the public authorities involved. The somewhat astonishing résumé is that ‘regulation has become more complex’ (interview OFTEL, November 2001b; similar interviews BT and DTI, November 2001).


61

If you have a monopolist with 100% and you have anybody coming in, then there is no dispute really about different market positions. However, as, for example, in the case of Internet call termination, where BT has had less then 20% of the market and the market is changing, here it is much more difficult to decide who is the dominant player or whether things are changing so rapidly anyway so that we do not have to do anything about it. (Interview OFTEL, November 2001)

Hence, even as checking the monopolist becomes less important, ‘regulation’, as one civil servant expressed it, ‘becomes more analytical’. From the perspective of public authorities, telecom regulation is becoming more information intense, and regulatory decision-making is becoming more difficult because the increase in the regulator’s discretion is paralleled by an increase in pressure for justification. ‘It might not mean more regulation, but more regulatory activity in order to come to a decision’ (interview OFTEL, November 2001). Moreover, the smaller (and weaker) market participants turn to the regulator to seek protection against the established incumbents. Coping with such (not always justified) complaints – as rising staff numbers in this area underline (Table 3.3) – has become one of the major occupations of the sectoral regulator (see below). Table 3.3 OFTEL staff numbers and running costs Staff numbers 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 2000 69

102 116 112 117 121 140 148 152 144 156 161 160 170 189 208

Source: Atkins (2001); NAO (1996).

Running costs (£ million at 1999/2000 prices) 1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

5.4

6.1

6.9

8.0

8.9

9.3

9.1

10.5

10.4

11.7

13.9

Source: Atkins (2001).

Incentivisation In addition, after a basic level of competition has been secured, other regulatory objectives like consumer information, societal participation and decisional transparency or social-redistributional (consumerist) schemes move

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to the forefront. In the UK case, such a development has been reinforced by policy changes of the Labour government, as expressed in the Utilities and Competition Acts. The regulatory efforts for such incentivisation are intense. The UK government has, for example, asked OFTEL to design regulation that provides cheap Internet access for schools and incentives for small firms to go online (interviews OFTEL, November 2001b; interview DTI, November 2001). It is especially in this context that experts fear a blurring of the distinction between the government’s responsibility for redistribution and the sectoral regulator’s task of providing for efficient economic regulation. Administrative Co-ordination In respect of administrative co-ordination, the UK telecommunication sector has undergone important changes, too. In particular, the Competition Act has reinforced OFTEL’s (and other sectoral regulators’) concurrent powers for handling competition complaints inside the industry. As regards UK telecommunications, this has been another peak in a long history of wrestling between the DGT and OFTEL which has been solved in favour of the latter. Thus, given the rising complexity of the regulatory tasks and acquisition of competence as regards competition, it is hardly surprising that OFTEL’s staff has been continuously expanded. Accordingly, OFTEL’s operating costs from 1990 to 2000 increased by 6.8 per cent, and its staffing levels by an annual average of 4.2 per cent (Atkins 2001: 1–2). Although, compared with the turnover of the regulated industry in 1999 (£20800000000), OFTEL’s costs amounted to a meagre 0.06 per cent – the lowest ratio among the utility regulators. Another indicator points to an increasing work load, the number of consumer complaints made to OFTEL is on the rise. In 1996, over 39000 complaints were made, in 1997 it was already around 47000, rising one year later to about 54000, and in 1999 OFTEL had to respond to more than 85000 consumer complaints, mostly in the area of mobile communication (OFTEL 1998; 1999). The fact that the DTI telecom staff has doubled in the last six years, from 75 in 1995 to about 160 in 2001 (interview DTI, November 2001), may serve as evidence of the government’s attempt to claw back influence (primarily in the context of the consumerist turn). However, compared with the other UK utilities, it should be noted that administrative co-ordination within the telecom sector is relatively conflict-free, most likely due to the fact that the involved public authorities have been working together for more than two decades. In sum, even though the UK telecommunications sector was one of the first


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to be reformed, it cannot be observed that its maturation leads to lower administrative efforts and thus lower ACs. As one interviewee noted, even though the sector is certainly ‘getting closer to effective competition … regulation is becoming more information intense and decision-making more complex’ (interviews OFTEL, November 2001; November 2001b; BT, November 2001); hence, there is (still) no sign of ‘deregulation or any retreat of the state’ (Thatcher 1999b; 105), and telecom regulation remains in need of continuous re-adaptation and supervision.

GERMAN TELECOMMUNICATIONS The German telecommunication market was in the hands of a public monopoly until the late 1980s. Before that, it was integrated into one single company, along with postal services and post-banking, known as Deutsche Bundespost. Change started in 1989. Then, Post Reform I split the Bundespost into its three constituent parts – Deutsche Post, Postbank and Deutsche Telekom – and established each as an independent operational unit, administratively separate from the Federal Ministry of Post and Telecommunications. In 1995, Post Reform II privatised Deutsche Telekom, while still, however, leaving the German government with the majority stake in DTAG. In the years to come, the German government continued selling DTAG shares, and today it holds only about 42 per cent of the company (Bundesregierung – Beteiligungsbericht 2001). Market Sustaining The development of competition within the German telecommunication market has been assessed to be very positive – especially since one has to take into account that the industry was liberalised only in 1998. However, the dominant position of DTAG was able to be ended only in the wireless market. In long-distance telephony and international calls, DTAG still holds 60–70 per cent of the market, and in the segment of local calls 98 per cent. Thus, as the sectoral regulator, RegTP underlined, DTAG still dominates the German telecommunications market (FAZ, 7 December 2001: 15). This means that, despite the fact that German telecom legislation stipulates that regulation automatically has to cease if the market domination situation ends (Immenga et al. 2001: 1), there remains plenty of work for RegTP. ‘Sooner or later, we must vanish … But it will take at least 20 years’ (interview RegTP, February 2000). In the mean time, price regulation and information gathering has turned out to be much more complicated and work intensive than projected. There are three reasons for what appears to be a slowdown in German regulatory action.

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First, there seems to be a tendency towards informal decision-making. Second, ‘75%–80% of RegTP’s decision are disputed in court. Either DTAG or we sue, or even both sue … That has become more important than the regulatory decisions themselves. The court is brought in as a referee’ (interviews Netcologne, March 2000; RegTP, March 2001). This affinity to court room solutions does not just postpone decision-making; it forces RegTP officials to draft their directives so as to make them legally bullet-proof – in even more rigorous ways than would be normal in Germany’s already extremely juridified administrative interaction. Moreover, in the administrative courts, RegTP is not allowed to motivate its decisions by taking recourse to informal material (usually from inside the industry), and it is thus doubly handicapped. Third, the still dominating incumbent – often politically protected by politicians (interview Mannesmann, February 2000) – retains crucial information, thus transforming price regulation for essential facilities into time-consuming guesswork. They give us huge amounts of paper with nothing in it … And if you ask them to explain a figure, you get an explanation and you have even more questions than before. So, it is quite a difficult process until you get the information you need, and sometimes you don’t even get the information, and then you have to make some estimation yourself … The idea was that I just compare their figures … and then say, ok, it is fine, and just sign it. But it is the other way around. I have to calculate the theoretical costs, and then I have to prove that I am right and not that they are wrong. And that is something which is, of course, a very hard business. (Interview RegTP, February 2000)

Incentivisation While the development of competition in the German telecommunication market has not yet led to a significant reduction of regulatory activity (though, as the figures below show, RegTP’s output has definitely diminished), in terms of incentivisation, ACs are hardly significant. Given decreasing prices, universal service goals, particularly those regarding affordability, have been achieved and are sustained through economic regulation. The remaining political pressure for government programmes, such as supporting the information society and the few customer services provided by RegTP (certification of reliable providers, Positivliste, mediation between customer and provider) are relatively insignificant and certainly do not need a lot of monitoring or regulatory incentive setting. This reflects, first, the healthy state of the industry, despite current problems, which still enjoys huge growth rates and fierce competition. However, one should also consider the implications of the fact that telecommunications are probably less essential for weaker parts of the society than are transportation and electricity prices.


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Administrative Co-ordination When, by 1 January 1998, the last barriers to competition were lifted – not just in Germany but in the whole EU – the Federal Ministry of Post and Telecommunications was dissolved. Some of its officials went to the Federal Ministry of Finance, and about 50 of its experts were transferred to the Ministry of Economics, which is now overseeing the telecommunications sector. The rest of the leading personnel of the post and telecommunications ministry (c. 250 officials) became the base of the new sectoral regulator, the Regulierungsbehörde für Telekommunikation and Post (RegTP). Additionally, the Bundesamt für Post und Telekommunikation, holding the technical expertise in telecommunications, also was merged into RegTP. The RegTP now comprises a staff of about 2430 – down from 2710 in 1998. The fact that absolute staff numbers are in decline should not be misunderstood. It is only the technical side that has been slimmed down. The economic regulators actually employed more personnel, and their number is now close to 300 (up from 250). It should also be noted that RegTP, as a Bundesoberbehörde, belongs to the portfolio of the Federal Ministry of the Economy. Formally, it is thus not as independent as its UK counterpart, OFTEL. Moreover, the existence of political pressures has been evidenced in virtually all expert interviews: ‘of course there is always political pressure … They have very subtle methods [for exerting it]’ (RegTP, February 2000); ‘If Müller [former Minister of the Economy] calls, Scheuerle [former head of RegTP] does what he wants’ (interview Netcologne, March 2000); ‘We see politicians who would like to influence telecommunications in their direction’ (interview DTAG, February 2000). It has also been remarked that, with the change to a social-democratic/green coalition, pressure has been rising further. More important in terms of administrative co-ordination seems to be that the natural regulatory competitor of RegTP, namely the Federal Cartel Office, also belongs to the portfolio of the Ministry of the Economy, though it is equally independent. This certainly reduces ACs for co-ordinating proactive and supervisory economic regulation. At least the relationship between the cartel office and sectoral regulators appears to be less conflictual than, for example, in the transport sector, where competing influences inside the government sometimes obstruct the regulatory task. The overview in Table 3.4 suggests that RegTP’s output in terms of decisions (about licensing, abusive behaviour, setting fees for the use of networks, and so on) seems to have stabilised, after having peaked in 1999. As has already been mentioned, the continuing high number of pending lawsuits on competition and market regulation issues – rising from 58 before

66

Table 3.4


Overview RegTP: regulation decisions, staff and filed lawsuits

RegTP regulation (Regulierung) RegTP decisions (Mitteilungen) Personnel* Lawsuits

1998

1999

2000

2001

140

169

88

59

113

606

765

737

2710 263 (pre-1998 58!)

2569 603

2555 471

2428 1011 (still pending 2/01)

Note: *Personnel development concerns the RegTP as a whole, that is, including staff for postal affairs. Moreover, reductions of personnel only concern the technical staff, while personnel for the economic regulation has been steadily increased (interview March 2001, RegTP). Source: Official Journal RegTP; homepage RegTP www.regtp.de.

1998 to 1011 by February 2001 – is another particular German feature of business–regulator relations in the emerging regime. Given the low stake of the Länder in the field, the regulatory personnel of the sector clusters at the federal level: RegTP (2430), the Telecommunications Department of the Federal Economic Ministry (since 1998 increased to 66) and the telecom staff of the Federal Cartel Office (7). In spite of the profound differences usually characterising regulatory modes in the German and British utilities, the telecommunications sector is perhaps the one possessing the most similarities. Both sectors belong to the vanguard of the reform movement in their respective countries and were among the first to be liberalised – though this happened in the United Kingdom ten years earlier than in Germany. Furthermore, in both countries, telecommunications is – in economic terms – the most successful utility: nowhere else are growth rates so high and the effects of innovation so apparent. Starting as comprehensively regulated sectors dominated by public monopolies, private competitors were able to be established relatively quickly and market concentration is steadily declining. Moreover, both countries opted for independent sector regulators as the central regulatory authorities. While in the case of the UK this choice became the standard model for the reform of the other utilities, it seems still rather exceptional for the Federal Republic.

UK ELECTRICITY After having been nationalised in the wake of the Second World War, the 1989


67

British Electricity Act restructured and subsequently privatised the UK electricity industry. Generation and supply were separated and a non-profit transmission grid (in the form of the National Grid Company) established. The power generation segment of the Central Electricity Generating Board (CEGB) was split into three new companies: National Power, PowerGen (conventional power) and National Power (nuclear power). The 12 area boards of the CEGB became private distributors called regional electricity companies (RECs) – each REC holding a public licence for a particular area and being obliged to supply all reasonable demands for electricity within its territory. First, huge industrial customers and, later, also normal ones were, however, able to choose a (second tier) supplier different to the official REC serving in their region. Market Sustaining To understand the regulatory development in the UK electricity sector in terms of market sustaining one has to distinguish carefully between generation, transmission and supply. Everybody who wants to generate, transmit or supply electricity needs a licence from the sectoral electricity regulator, OFGEM (former OFFER). The transmission grid, as a non-profit organisation, is regulated by OFGEM and is subject to the price-cap formula RPI–X. Generation, however, is thought to be on track towards competitiveness, and no particular price regulation applies. However, the trading mechanism for electricity between the suppliers and generators has been set up by the state. Originally that mechanism was known as the ‘pool’. The pool operated on the basis of competitive biddings by generators. That system, however, has not been functioning to the full satisfaction of its inventors (Eising 2000a: 167). Some incidents of manipulation, together with the possibility (lawful but against the spirit of the system) of making bilateral contracts to sell power for a fixed price on a particular date in order to safeguard against price volatility, led to the abolishment of the pool in early 2001. It has now been replaced by the New Electricity Trading Arrangement (NETA) which basically constitutes a more traditional wholesale market for electricity, operating in much the same way as normal commodity markets do. Hence, generators are now free to contract directly with purchasers. Since small consumers are also allowed to switch suppliers, 37 per cent have decided to do so. But the regional incumbents still dominate the electricity markets and do hold between 72 per cent and 80 per cent of the shares (interview OFGEM, November 2001b). In comparison, the market shares of the two biggest generators, National Power and PowerGen, went down from 45.5 per cent and 28.5 per cent in 1990 to 21 per cent and 19 per cent respectively in 1998.

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Incentivisation In the 1990s UK energy policy was ‘absolutely driven’ by the neo-liberal liberalisation ideology. The conservative governments ‘focused very much the promotion of competition’ (interviews DTI, November 2001b; OFGEM, November 2001b). From 1997 onwards, however, social and environmental objectives came more to the forefront, and there is evidence that ACs related to incentivisation have been rising since. The turning point, as in the other utilities, was the Utilities Act. For example, whereas renewable energy policy was previously a matter of bringing them ‘quickly into the market without having to put into place specific legislation’ (interview DTI-II, November 2001), there are now various attempts to strengthen the change to new fuel generation in terms of grants for developing offshore wind, research and development (R&D) funding, and photofoltaic (some £22 million for the next 20 years), and, more importantly, the Renewable Obligation (RO) is about to be introduced. The RO means that ‘suppliers have the obligation to purchase a certain amount of “green” electricity and show that they supply that to their customers’ (interview OFGEM, November 2001a). ‘Moreover, the government has started to issue environmental and social guidance, and OFGEM has translated that in[to] Environmental and Social Action Plans’ (interview DTI, November 2001). This has meant more competences for OFGEM (OFGEM 2001a). Also, before the Utilities Act, the government was active in social and environment issues. But now the ‘sort of varied pieces’ (interview OFGEM, November 2001b) have been put together and consolidated. The Energy Consumer Councils have been merged into EnergyWatch, and, for example, the order of the statutory priorities of OFGEM have been turned around: ‘now the principal objective is to protect interests of customers where appropriate by promoting competition’ (interview OFGEM, November 2001b). All this has brought an additional ‘element of complexity’ to OFGEM’s work. Its regulatory work has become more difficult: How to regulate the industry in a world of growing demand? … You want to set the right incentives and to do that efficiently, I mean, this is quite a regulatory challenge … It is not so obvious as stripping out the initial inefficiencies and bringing down prices … We are in less obvious territory now. (Interview OFGEM, April 2001)

Administrative Co-ordination The rising complexity in setting incentives for social or environmental purposes is paralleled by an increase in staff, in particular in these areas. The result of ‘the higher profile of our secondary duties’ is that officials ‘are buried


69

with work’ (interview OFGEM, November 2001b). In particular, as regards support for the development or improvement of technologies for renewable energy, the workload is not likely to decrease soon (interview DTI, November 2001b). As regards ACs of administrative co-ordination, the UK electricity sector comes off well. The fact that OFFER and OFGAS have been merged is to be viewed as positive. In the long term there is certainly room for exploiting synergies and reducing some staff. The public regulatory authorities involved consist, in principle, of the triade of competition authority, sectoral regulator and government. However, after the dissolution of the energy ministry in 1992, most of it went to the DTI, although parts were also subsumed under the Environment Ministry. As one interviewee noted, the co-ordination of the UK government’s renewable approach, especially, has not been in accordance with a ‘sensible structure’. As he added: ‘it is curiously British, though’ (interview DTI, November 2001). On the other hand, the relationship between OFT and OFGEM, which has been given concurrent powers in the competition area, has been portrayed as unproblematic (interview OFGEM, November 2001). The administrative costs remain as regards the change from the pool to NETA, as does the potential risk of the effects when increased wholesale costs have to be placed on consumers by a fragmented and competitive retail market. Expecting problems similar to those in California seems exaggerated. However, regardless of whether it is the pool or NETA, both get combined with fragmentation in retail and consolidation in wholesale markets. Moreover, both have to put up with efforts to push social and environmental objectives. Hence, there is no evidence for an overall reduction of ACs. The reorganisation and privatisation appear to have led to greater Verregelung, that is, ever more regulation. Supporting evidence for such a view may be seen in the data reported in Table 3.5. OFGEM operating costs – discounting the merger costs as well as the expenses required by creating NETA – saw a 10.5 per cent annual increase in real terms during the 1990s (Atkins 2001: vii). The staff increased annually by an average of 9.3 per cent (see Table 3.5). The somewhat ambiguous picture – increasing competition, decreasing prices but higher ACs – may be explained by the basic conflict running through the UK electricity sector: I suppose, the situation we are in is that we have conflicting desires. One is markets, which run on their own, where you don’t have government interventions … They set their own prices and are almost self-regulated. And then you have a requirement that you do have to have green power. So the government sort of has to intervene into this market to change the playing field slightly. (Interview DTI, November 2001)

Table 3.5 OFGEM and OFFER staff and OFGEM operating costs OFGEM (OFGAS + OFFER) staff numbers 1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

2000

2001

—

19

21

28

28

188

288

249

269

287

301

343

360

386

439

521

555

Note: OFFER was established only in 1989. Source: Atkins (2001).

OFFER staff in the 1990s 70

1991

1992

1993

1994

1995

1996

1997

1998

1999

214

N

222

214

217

231

233

252

Merger

Source: Derek Herbert, DTI.

OFGEM operating costs* (£ million) 1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

10.1

9.9

10.5

12.8

13.5

19.2

24.2

29.7

38.0

48.5

62.8

Note: *1990–98 the numbers express the sum of the operating costs of OFFER and OFGAS. Source: Derek Herbert, DTI.


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GERMAN ELECTRICITY The speed and pervasiveness of the 1998 liberalisation of the electricity sector came as a surprise to many observers. In crucial respects, the German Electricity Act seems to be even more market-liberal than the crucial EU regulation would require. Be that as it may, the fact is that the German electricity market was, at least formally, opened up without any transitory phase. Market Sustaining The crucial difference between the UK and the German electricity sector before the reform was that public ownership of the industry was much more centralised in the United Kingdom than in Germany. Two particular characteristics of the new German regulatory approach can only be explained in the context of that absent centralisation and dispersed ownership structure. First, no central sectoral regulatory body has (yet) been established.2 Second, to provide for a minimum of common rules, the market participants in the form of their interest associations have been asked to negotiate association agreements (Verbändevereinbarung) in order to sort of self-regulate their interaction (in particular to determine the conditions for using essential facilities; Energiewirtschaft 1999; Engel 1996: 125; Seeliger 2000). The associations are supposed to agree, first and foremost, to the conditions of Third Party Access (TPA) and respective fees autonomously. However, in case they cannot come to an agreement in due course, the government has the right, and hence is granted the authority, to prescribe specific rules hierarchically. In other words, the Ministry of Economics may assume, in exceptional cases, the role of ‘something like a regulatory official body … What in other countries is done by the regulator is done by companies in Germany’ (interview RWE, April 2000). As regards market sustaining, leaving it to the interested parties to get a regime regulating the network access is the best possible option, at least in terms of cost saving for the state. However, in practice this solution is criticised because it is said to favour incumbents to be to the detriment of newcomers. Despite rising pressure from the EU and from inside the industry, the German government seems to be inclined to defend its unique model. In the meantime, the saved ex ante regulation, on the one hand, contrasts with a rising number of complaints about unfair competition in administrative courts and before the federal and regional cartel authorities, on the other. Incentivisation In terms of social and environmental regulation, and thus in terms of setting

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the right incentives for industry, there are plenty of instruments in use in Germany – some of them not unlike those in use in the UK. For example, in Germany renewable energy generators enjoy 100 per cent demand security and fixed prices though declining over the years. Germany has also accepted far-reaching commitments in the context of the Kyoto process (Handelsblatt, 9 January 2002). However, the present government policy to exit nuclear power and also the Kohlepfennig – that is, cross-subsidising electricity produced by German coal via a particular electricity tax – and the ambitious target of quickly reducing CO2 emissions, and all that in the medium-term, may not be a coherent and feasible strategy (Bundesregierung, Bundesministerium für Wirtschaft und Technologie 2001). All this does point to an increase, rather than a decrease of ACs. Administrative Co-ordination Not establishing a sectoral regulator appears to have had at least four consequences. The federal Ministry of Economics (BMWi) has become the focal point in terms of administrative co-ordination. Moreover, ex post competition and cartel regulation have partly had to offset ex ante rulemaking; consequently, this has increased the importance of the Federal Cartel Office. Conflicting parties, however, have made massive use of the administrative courts in order to sort out their regulatory quarrels. And, finally, the German Länder governments continue to exert considerable influence. The former Minister of the Economy, Werner Müller, came in with the social-democrat/green coalition in 1998. He came from and went back to the private energy sector – it thus may not come as a surprise that he turned energy policy into a main issue (Chefsache) (interview BMWi, March 2001). Most recently, also, an influential secretary of state, Alfred Tacke, involved in many crucial decisions about the electricity market, left the government to work for RAG a big company on the German energy market (FAZ, 3 September 2004). ‘Revolving-door’ changes at that level are very uncommon in Germany, to say the least, and the job change of Mr Tacke, in particular, has been harshly criticised. One notes further that the personnel of the energy department within the BMWi increased from 108 in 1989 to 134 in 2000.3 However, 2001 saw two important reorganisations: first, the former head of the 8th Beschlusskammer of the Federal Cartel Office (the unit deciding about electricity markets) was made head of a special task force, inside the Federal Economic Ministry, to contain anti-competitive behaviour of the incumbents. He was also provided with additional staff. Moreover, electricity matters were taken out of the portfolio of the 8th Beschlusskammer of the Federal Cartel Office, and a particular unit (with additional staff!) was created instead exclusively for


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electricity. Given that regulatory personnel at the Länder level has by and large retained its pre-reform dimension – the 16 Bundesländer maintain a staff of 130–150 full-time officials for that task, of which about 65 engage in competition or cartel issues for energy production and supply – this tendency underlines that the federal ministry and the cartel office are the two central regulatory players. However, if, as has been suggested, the task force turns out to be the nucleus of a true sectoral regulator, a more conflicting relationship between ex post and ex ante focused authorities may be a side effect. In sum, given the particular historical development of the German electricity industry, it seems fair to say that regulatory changes have only brought about a modest transformation. Despite quick and thorough liberalisation, the market has retained its particular features – in particular its characteristic of its 1001 Stadtwerke, as local distributors and, sometimes, even producers. No special agency has kept ACs in check so far. Although this is going to change with the arrival of the new electricity regulator, up to now there has been just a modest increase in federal (ministry and cartel office) staff and, closely related, the German model – unique in the EU – of selfregulation and self-enforcement by the regulatees. For market-sustaining and administrative co-ordination, it is thus the most ACs-efficient regulatory solution of all the utilities under study here. However, the efforts to guarantee social and environmental services, in terms of incentivisation, have been more accentuated, and a number of new laws have increased the obligations here. One will, however, have to observe how ACs develop from January 2005 onward.

UK RAILWAYS In many respects, British railways are probably the most intricate of all the utilities under review here.4 Competition is still far off, although the desire to inject some competition quickly was the argument for rushing through a complicated regulatory structure that, in the mean time, has itself become a major obstacle to regulatory progress. Instead of helping the industry to sort out capacity bottlenecks and to improve the quality of services, policy-makers and regulators have been forced to spend a great deal of their time struggling to alter the system itself. A couple of tragic accidents and overly selfimportant personalities confounded the problems to a veritable stalemate (interview). In autumn 2001, after the arrival of a new transport minister and the exchange of some regulators, consolidation appeared possible at last. The bankruptcy of Railtrack – after all the heart or powerhouse of the railways industry, as Tom Winsor (2000: 2) put it – opened the door to another round

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of restructuring. At the time of writing ‘everything is up in the air’, to quote one public servant’s view of the enormous uncertainty for regulators and industry alike. Market Sustaining The genesis of the regulatory regime (White Paper 1992, Railways Act 1993, Transport Act 2000) is covered in detail elsewhere. It should be noted, though, that the government’s reluctance to provide Railtrack, whose share prices fell below emission level in May 2001, with additional funding led to its technical bankruptcy and a de facto re-nationalisation, in all but name. As regards market sustaining, it is obvious that within the UK rail sector there is hardly any (unregulated) competition at all. Hence regulation is not a matter of market sustaining, but still a matter of market creation. The number of actual and potential market participants remains limited – not least of all because of the technical properties of the network. However, competition regarding secondary elements of franchising contracts, such as catering or non-smoking areas, is advancing in the freight business and throughout the bidding process (interview SRA, November 2001). In any case, as the quick succession of the Railways Act, Transport Act and the imminent restructuring after the bankruptcy of Railtrack indicates, there is great and ongoing legislative activity, and thus rising ACs, since ‘after the event it is harder to alter something’ (interview ORR, November 2001). Despite the expectation that ‘civil servants within the Department of Transport would sort of whither away to nothing more than 4 or 5 people’ (interview DTLR (Department for Transport, Local Government and the Regions), November 2001), the number of regulatory staff has rocketed. The railways directorate of the Department of Transport alone is about to recruit more than 40, thus roughly doubling its size, mainly to cope with the Railtrack disaster. Incentivisation Furthermore, inside the regulators there is increasingly a need for industryrelated information, since, as one interviewee has said: ‘Your understanding of issues increases, so you are now asking for different kinds of information than before. Before when we got information, we thought that is fine. Now we are saying, yes OK, but what about this and that. We keep learning’ (interview ORR, November 2001). As the experience of regulator and regulatees increases, more regulatory devices are developed. A telling example is the asset register. After privatisation, Railtrack, actually similar to the DB (Deutsche Bahn), did not exactly know what state its assets were in – that is, railway land and facilities, and so on – and, perhaps more importantly, they


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often did not know the kind of care they would need. The lack of such information in the form of an asset register made itself especially felt in the wake of the two latest accidents. Railtrack answered to the increase of safety concerns after the accidents, inter alia, by lowering speed limits – though, due to lacking information, in a blanket coverage way. This led to delays, most of which could probably have been avoided if more detailed and distinguishable information over the quality of tracks, signalling, and so on had been available. However, a comprehensive register for better managing the industry assets had to be carefully planned by the ORR, and it will need continuous regulatory coverage. As this example indicates, information costs definitely increased after regulatory reform: ‘There is a great desire for information … When you start fragmenting the industry, then you need transparency of information. The more fragmentation you have, the more information you need’ (interview ORR, November 2001). Administrative Co-ordination As regards administrative efforts, the lesson of the UK railways seems to be that emulating a market by means of reallocating competences and institutional roles will necessarily remain less efficient than a real market. The state forwent the advantages of hierarchy and, by establishing a sort of a fake market (for which it needs to separate regulatory and financing powers), it got the worst of two worlds: no (or little) economic efficiency gains (state subsidies are needed to keep the railways going) and increasing administrative costs for the new method of governing the sector. The public authorities thus need many more staff to cope with the increased complexity of the regulatory tasks and to fulfil their new supervision and informational obligations. In terms of incentivisation one has to point to the huge amounts of government subsidies, which find their way into the sector, mainly through the SRA. Allegedly, the Conservatives had been promoting proceeds of privatisation instead of protecting the public interest. By contrast, the Labour government has set out to correct that bias with the Transportation Act, and it has been much more proactive in boosting consumer interests. The regulatory effort to set the right incentives for Railtrack, TOCs and ROSCOs is extraordinary. Since the franchises are set up for many years, most issues have to be settled in advance, and they literally take the form of detailed contracts between the regulator and regulatee. This goes hand in hand with increased supervision needs on the part of the public authorities, particularly where public service goals (sufficient transport service in remote areas, affordable pricing for London commuters) are directly funded by the state. Moreover, it is not only a matter of receiving the information. It is also one of analysing it appropriately:

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Institutional change and environment There is more information available [after privatisation] but each organisation produces its own information in the way it wants it and it may not be easily reconciled with somebody else’s information … There is more information, which is good, but it has not been getting easier to understand and interpret that information. (Interview DTLR, November 2001)

The biggest drawback of the regulatory solution for ACs in the UK rail sector are the repercussions for administrative co-ordination that derive from the complex separation of regulatory powers. There are three sectoral regulators – the ORR, the SRA and the Health and Safety Executive (HSE) – and a transport minister, who, thanks to the huge amounts of public money spent on subsidising rail services, is in a more influential position than his colleagues responsible for other utilities. What on paper probably looked easy and clear-cut – the ORR is the economic regulator focusing on Railtrack, while the SRA designs and auctions franchising to train operators, and the HSE (as before privatisation) copes with security issues – turned out to be much less clear and more difficult to manage in practice. The management problems stem, first, from the fact that ‘co-ordination is not sensible’ and, second, from the ‘duplication of functions’ inherent in the chosen way of reorganising the sector (interview SRA, November 2001). The Transport Act already marked the first major reorganisation. The ORR lost its consumer protection competences (and related staff) to the SRA. At the same time, however, the ORR was able to establish itself as the de facto sectoral competition authority, thereby partly outplaying the OFT. The relationship between the transport minister, the ORR and the SRA has been problematic. Irritations between the ORR and the SRA seem particularly dramatic. Under the first Labour government there was a huge split between ORR and SRA. Morton went around telling everybody that this is now ‘his’ railway and … Winsor was some sort of economic legal technician with no clout whatsoever. And Winsor went around telling everybody that he was now ‘Mr UK Railway’ and it was up to him to make railway policy. They hated the sight of each other, and it was just a straight disaster.

This ‘coordination deficit’ would have been counter-productive in a healthy industry, but in a sector plagued by security and capacity shortfalls, it made itself felt even more. The quick succession of a number of transport ministers after privatisation has compounded the problems of a lack of strategic vision and continuity. Even more so since some of the ministers displayed a tendency towards ‘micromanaging’ railways, thus stirring up the survival instincts of the regulators and their organisations – making working relations between the public bodies involved even more ‘antagonistic’ (interview DTLR, November 2001).


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In sum, ‘turf wars between the ORR, the SRA and the HSE’ and the formalisation of relationships in a more fragmented industry have made regulatory relationships ‘antagonistic and contractual’ and they have, at the same time, to an unprecedented level, brought about administrative efforts to sustain such a complex regulatory structure. Finally, the available numbers also support an increase in ACs. For example, Nash estimates that the 1993 reform increased government ‘grant[s] paid for passenger services from £458m to £1960m’ (Nash 1996: 61). Moreover, the ORR is more expensive than the utility regulators such as OFGEM or OFTEL. Measured in operational costs, divided by the turnover of the UK railways industry, it retained 0.16 per cent. Between 1996/97 and 2000/01 ORR costs increased by 14.4 per cent on annual average; its staffing levels rose annually by 8.3 per cent (Atkins 2001; see also Table 3.6). While the Railways Inspectorate’s staff numbers remained stable throughout the 1990s, the number of staff member among other regulators and the railways department within the Ministry of Transport increased considerably.

GERMAN RAILWAYS Inefficiencies and reform needs within the German railways sector became increasingly apparent in the 1980s. The perception that it was necessary to reform the German railways was less a consequence of European initiatives or of an ideological shift among German policy-makers towards market liberalisation than of the understanding that, if nothing happened, the financial deficit of the Deutsche Bundesbahn would soon run out of control. Hence, in early 1989, a state commission was set up to work out suggestions. The fall of the Berlin wall a few months later and German unification in 1990 completely changed the parameters of the commission’s task. In particular, the prospect that Germany would resume its role as a major East–West transit country and the duty to integrate and modernise the railways of the former German Democratic Republic (GDR), the Deutsche Reichsbahn, exerted pressure to reach a more radical solution than was possible in the previous 15 post-war reform attempts (interview BMVBW, August 2000; Herr and Lehmkuhl 1997; Lehmkuhl 1996). In 1992/93, on the basis of the state commission’s proposals, a structural reform of the German railways was adopted. Market Sustaining As in the UK, in Germany, railways regulation today is not about market sustaining but about market creation: the goal is still to inject rudimentary competitive features into a hugely inflexible and only slightly innovative

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Table 3.6

ORR staff and operating costs, DTLR staff and OPRAF-SRA staff

ORR staff 1993

1994

1995

1996

1997

1998

1999

2000

—

32

75

87

130

142

160

165

1996

1997

1998

1999

2000

7.3

7.8

8.2

12.6

13.8

2001

Source: ORR Annual Reports (1994).

ORR operating costs (£ million) 1993

1994

1995

2001

Source: Atkins (2001).

DTLR staff

Staff

1990s–2001

2002

c. 55

55 + 44

Source: ORR interviews, November 2001.

OPRAF-SRA staff

Staff

1993

1994

1995

1996

13

41

69

102

1997

1998

1999 20001

129

140

250

2001 284 (341)2

Notes: 1. BRB and OPRAF do already compose the ‘shadow’ SRA. 2. To the 284 one had to add 108 staff from the BRB Residuary Ltd and another 49 from the Rail Passenger Council (SRA Annual Report 2001: 95). Source: OPRAF Annual Reports 2000, SRA Annual Reports 2001, SRA Annual Reports; all reports available at http://www.sra.gov.uk.


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market, characterised by little technological progress, low growth rates, high sunk costs and continuing dependency on government subsidies for modernising tracks and sustaining regional passenger transport. The development of competition is sluggish. There are an estimated 150 railway enterprises operating in Germany, mainly in niches DBAG considers unprofitable. These claim only about 3 per cent of the overall market, though they hold one-third of the local passenger transport market, with this tendency increasing. Railways reform has indeed meant an increase in the need for regulation (see Table 3.6). There have been a large number of new laws and directives: not least significantly, the German Länder had to draw up their own legislation for their newly won competences (Ewers and Ilgmann 2000: 34). From 1994 onwards, the federal competition authority, as well as the newly created quasisectoral regulator, the Eisenbahnbundesamt, began increasing the number of formal and informal decisions (interviews EBA, August 2000; BKartA, September 2000). And, last but not least, the German administrative courts have been busy with appeals reviewing public decisions. Current staff numbers are difficult to compare with those before the reform. First, the merger of the former West German monopolist with its East German counterpart led to considerable overcapacities. Since privatisation, DBAG has been cutting personnel. However, former civil servants remain under a special regime for which the federal government is finally responsible. A particular agency, the Bundeseisenbahnvermögen, has even been created for the task. Second, in particular, the new technical railways office, the Eisenbahnbundesamt, has been recruiting staff since its inception in 1994: they have added around 1000 employees. Ninety per cent of the workforce came from the two railways, Deutsche Bundesbahn and Deutsche Reichsbahn. Of the remaining 10 per cent, most came from the Federal Ministry of Transport (BMVWB). One notes that in the Federal Ministry of Transport, where the railways reform was actually prepared, the responsible unit increased its personnel from 43 in 1990 to 64 in 1992. Then its staff decreased, after 1994, to its current 51 members (still 20 per cent above its 1990 level!). Third, the regionalisation of the responsibility for the railways and the ordering principle (Bestellerprinzip) according to which local and regional authorities have to ask (and pay) for local passenger transport, have led to the creation of many public–private partnerships in various forms, and have increased public railways staff within regional and local authorities. Incentivisation As regards incentivisation, the situation in Germany appears to be much simpler than in the United Kingdom: the federal government is owner of the

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DBAG, the ‘de facto monopolist’, and it is also the principal rule-maker for the whole industry. The obligation to retain the overall responsibility for the railways – in particular for the tracks – has even been written into the German constitution (Article 87 GG). This does not preclude privatisation of up to 49 per cent. However, plans to bring DBAG (or parts of it) to the stock markets have already been been postponed several times; hence the federal government remains 100 per cent owner of the DBAG. The costs for this responsibility of the federal government are very huge. Ewers and Ilgmann (2000: 4) reckon that (although the German railways’ shares of an expanding transport market have only very modestly increased and in most segments have even stagnated) the federal government pays €10 billion per year to satisfy debts and obligations of the DB-West. Another €6 billion are paid to the Länder so that they can order local and regional passenger transport on the market (thanks to federal funds for regionalisation known as Regionalisierungsmittel); and another €4 billion are used to buy socially desired services. Finally, the federal government invests about €3.5 billion per year in the track system (down from €5 billion in 1994 – which, one notes, DBAG was not able to spend completely in 2001 because of lack of planning capacities). This adds up to €23.3 billion each year that goes directly or indirectly into the railways (not counting additional Länder subsidies). It comes as little surprise that a financial commitment of such heights also brings along huge political pressures, in particular as regards investment decisions about which lines and which kinds of trains will have priority. Thus, while in the post-reform period public financial support of the railways has become more transparent, the liberalisation and restructuring efforts have not translated into state savings. Administrative Co-ordination This is also an area where the increase in ACs is obvious. The EBA, originally conceived as a technical expert, now aspires to become a fully-fledged sectoral regulator like the ORR, and it has made progress in acquiring a kind of informal regulatory competence (interview EBA, August 2000). It also has good chances of reaching that aim formally in the next amendment to the railways legislation (FAZ, 28 November 2001: 15; Schwenn 2001). This sets it against the federal competition authority, which itself has been eager to expand in this area (interviews BKartA, September 2000; BMVBW August 2000). Despite the different regulatory philosophies embodied by the two institutions (ex ante sectoral regulation, on the one hand, and ex post general competition, on the other), it has been already underlined that ‘whoever gets more regulatory tasks will also need more personnel’ (Albert Schmidt, quoted in FAZ, 17 September 2001: 17). One notes in this context that the conflict


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between the competition authority and the EBA is also reproduced at the level of the federal government. The transport minister wants to transform the EBA (which belongs to his portfolio) into a strong(er) regulator. In contrast, the minister of the economy would like to see the general competition authority more committed to the areas it is responsible for. And, last but not least, the finance minister (and allegedly also the chancellor) backs the DBAG, since the better the DBAG is doing, the earlier he will be able to sell it on the stock market (27 November 2001; 28 November 2001). In sum, it appears that ACs in the German railways sector are on the rise. However, the situation is less dramatic than in the UK. First, as regards market sustaining, ACs have increased because competition has not developed as expected, and the federal competition authority and, even more so, the EBA have been increasingly busy keeping the DBAG’s anti-competitive tactics at bay. Second, the public service obligations are huge; the federal governments’ subsidises to industry and consumers are now more than €20 billion a year. Despite that, financial dimension associated with incentivisation, supervision and monitoring costs are low compared to those in the UK. This is mainly because the state has retained direct control over investment decisions. Finally, the set-up of the regulatory competences is clearer than in the UK. Therefore, there is less inter-administrative co-ordination and hence less ACs in Germany than in Britain.

THE EUROPEAN LEVEL This analysis is focused on the administrative costs of governance changes in the United Kingdom and Germany. There is, however, no doubt that the European Union has an increasingly important impact in these areas. Figures 3.2 and 3.3 give a short overview of the EU activities in the utilities, displaying regulations and European Court of Justice (ECJ) judgements in the 1990s. European Union regulation and judgements have speeded up 30

30

20

20

10

10

0

0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 Telecom

Figure 3.2

Electricity

Rail

EU Acts in telecommunications, electricity and rail

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30

30

20

20

10

10

0

0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 Telecom

Figure 3.3

Electricity

Rail

ECJ judgements in telecommunications, electricity and rail

liberalisation in telecommunications and electricity. The EU impact on railways, however, has been rather limited thus far. As regards ACs, two points seem worth noting. First, market sustaining, incentivisation and administrative co-ordination coming from the EU bring ACs in addition to the administrative efforts of the member states under scrutiny here. It is evident that the EU functions as a trigger, or rather framework setter, while the material costs of implementing market creation and incentivisation strategies are carried by the member states’ administrations. The exception to this rule of thumb are costs deriving from administrative co-ordination. A growing number of important competition cases are decided by the EU Commission’s Directorate General for Competition Policy (DG IV) and a considerable number of appeals to the ECJ (see Figures 3.2 and 3.3). In addition, the Commission staff in telecommunications, energy and railways has been increasing continuously, although, owing to a number of mergers of DGs and horizontal distribution of competences inside the Commission, exact numbers are difficult to obtain. Moreover, the Commission has begun to claim veto rights over the decisions of national regulators (as in telecommunications – FAZ 2002: 15). It also has put pressure on individual member states – in this case Germany – to establish a national sectoral regulator in electricity. All this translates into policy co-ordination costs, which seem, however, not unusually high given the complexity of relationships in a multi-level system. The national support for more EU engagement in the day-to-day regulation of the utilities is limited. As our interviews show, national civil servants clearly oppose it. However, new entrants usually view the European card as a trump to speed up the liberalisation of national regimes, while, like regulator–regulatee relationships at national levels, the market-dominating incumbents (who have the most to lose) disapprove of EU regulatory interventions. As stated in one interview: ‘We see some risk that the EU Commission [might] take over more responsibilities and overrule national regulators’ (interview DTAG, February 2000). In certain areas there are also suggestions to centralise crucial regulatory


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powers at the EU level or even to establish EU sectoral regulatory agencies. At the Laeken summit, for example, the heads of state and government recommended (upon a proposal of the Commission) setting up a European agency for the safety of the railways (see European Council 2001). More outspokenly, an expert report (commissioned by the Commission) in the context of the process of the governance White Paper demanded the establishment of European sectoral regulators for electricity and telecommunications. While the dynamics inside the utilities make forecasts difficult, it is fair to say that private associations or loosely institutionalised groups or round tables of national sectoral regulatory bodies have thus far dominated the public–private interaction at the European level and, at least for the time being, fully-fledged EU regulators still seem some way off.

CONCLUSION: TOWARDS A MORE COSTLY AND MORE ANALYTICAL ADMINISTRATION The 1980s saw a discussion about the (necessity of the) shrinking of the state and its administration. Privatisation and deregulation were put forward as means to reaching economic efficiency and to getting the state out of the business of business. But when the first reforms were implemented, warnings and misgivings grew that reconciling both objectives by privatising public monopolies and deregulating markets might, in the end, be accompanied by new regulatory tasks for the public authorities, not necessarily fewer such tasks. Near the end of the 1990s – in no small part because of the catalytic influence of the European Union (Héritier et al. 2001) – reform processes were accelerated and spread throughout the entire EU. As a result, we are now – perhaps for the first time – in a position to compare systematically the effects of the reforms across countries and sectors. Conceptualising such an empirical comparison, this chapter has attempted to study the effects of the recent restructurings of the telecommunications, electricity and rail sectors in the United Kingdom and Germany by focusing on the changing role of the public administration. The focal point of the analysis has been on the development of administrative costs, understood as administrative efforts or burdens to manage a reformed utility regime in the three areas of market sustaining, incentivisation and administrative co-ordination. The results, as reported in the six case studies above, may be summarised as in Table 3.7. Table 3.7 highlights some important points. Regulating telecommunications carries the lowest ACs. At the same time, the distribution of ACs in the telecommunication sector (among the three dimensions: market, incentives and co-ordination) in the two countries is very similar. Hence, in terms of ACs, there are no big differences between German and UK telecommunications.

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Table 3.7 Assessment of sectoral administrative costs*

UK telecom German telecom UK electricity German electricity UK railways German railways

Market sustaining

Incentivisation

Co-ordination

Sum

1.5 1.5 1.5 0.5 3.0 2.0

0.5 0.5 2.0 1.5 3.0 2.5

1.0 1.5 1.0 0.5 3.0 2.0

3.0 3.5 4.5 2.5 9.0 6.5

Notes: 0.5 = AC very little; 3 = AC very high. * The analysis of the pertinent documents and literature as well as the semi-structured expert interviews built the basis for the assignment of the values. The values represent relative assessments. For example, on the basis of our empirical data, administrative co-ordination have been least costly in German electricity and most costly in UK railways. The position of each sector in a particular column thus indicates its relative position as compared with the best and worst of the respective six examples investigated. However, the translation of qualitative results into a particular value can only indicate a tendency.

Administrative costs in electricity take the middle ground. It is more costly than telecommunications but still much less costly than the railways. Besides, the regulatory solutions the countries adopted for their electricity sectors go more visibly in different directions, leading to a greater variation in the distribution of ACs along the three specified ACs dimensions. German electricity administration (supporting self-regulation and the renunciation of a sectoral regulator) appears less costly than the UK administration (where the transition from the pool to NETA has offset efficiency gains by the merger of the two regulators, OFFER and OFGAS). Finally, in the United Kingdom, as well as Germany, the railways entail the highest ACs. (However, one has to keep in mind that, in the UK, there has been a real privatisation of the railways, while in Germany, DBAG is still under government control.) The country differences in ACs for the railways are still a bit higher than in electricity, but this fact is overshadowed by the huge absolute burdens the railways inflict upon each administration. From a general perspective on cross-country ACs, however, the data suggests – somehow surprisingly – that the United Kingdom only has lower sectoral ACs than Germany in telecommunications. Germany is doing better in electricity and the railways, and thus has a lower average ACs than the United Kingdom. But the data also points to some other issues. For example, we observe relatively low ACs in UK and German telecommunications as well as in


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German electricity. Classifying ACs in three different categories (market, incentives and co-ordination) allows us to make an additional conjecture: in telecommunications, ACs have obviously been kept in check by a growing market that has made incentivisation ever less problematic, while the low level of ACs in German electricity is the result of a corporatist regulatory solution, which bypasses the administration efforts to develop economic regulation and co-ordinate its own actions. The fact that the UK electricity sector has been assigned relatively high ACs is the result of the recent restructurings and may thus be a temporary phenomenon. However, in the perspective of the present analysis, these reorganisations have added a lot of co-ordination ACs. Even so, there may be potential for ACs savings in the medium term when the investments start to pay off. The railways are problematic in both countries. However, in terms of ACs, the United Kingdom undoubtedly maintains the most expensive sectoral transformation. But the German railway sector also requires far more intensive intervention in terms of ACs than other national utilities. While one may contest the assignment of particular values, the tendency captured in Table 3.7 appears to be justified by the qualitative analysis. The gradual decrease of state involvement in telecommunications below the levels of electricity and the railways fits well with the findings of the authors of the other chapters in this volume. Having shortly summarised the main results of the empirical investigation, the question towards which this chapter now turns is how this evidence relates to the three main hypotheses developed above. As regards the first hypothesis, that is, that regulatory activity in the economic sphere does not fade away with the arrival of satisfactory competition, one has to admit that a reasonable degree of competition (somewhere between stage 2 and 3 – see Table 3.1) is only to be expected to come about in telecommunications. However, there we observe that the administrative efforts to regulate the emerging competitive market are still considerable. Therefore, ACs for market sustaining have certainly not been extinguished; at best they have been contained. The normative theory of regulatory change, in other words, is much too optimistic and does not sufficiently mirror the complexity of the empirical evidence. According to the second hypothesis, once pure market competition is no longer able to guarantee the provision of certain public service goals that are thought to be politically desirable, state authorities have to set incentives and supervise compliance of private actors to deliver such common goods. This, in turn, increases ACs. Indeed, the empirical cases have shown a connection between badly performing markets (railways, electricity) and rising ACs for incentivisation. The two contrasting examples – UK railways and German electricity – however, offer some further interesting interpretations. In terms

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of keeping ACs in check, German electricity offers a realistic way out by taking recourse to self-regulatory strategies. This lowers incentivisation ACs tremendously. The UK railways are a case in point for the opposite strategy, that is, the attempt to mimic a market situation by artificially setting up a competitive structure in which actors are supposed to follow individually their economic efficiency-maximising strategies. If now the same actors are relied on to deliver social goals visibly in defiance of economic efficiency maximisation, this requires that public authorities design incentives and verify compliance in a way that does not interfere with the ACs-intensive cryptomarket they themselves have established in the first place. Such a solution may yet work; however, even in a best-case scenario, only at high administrative costs, and UK railways are certainly closer to a worst-case scenario than anything else. Such a comparison between well-performing German electricity regulation and badly performing UK railways may seem unfair. However, in terms of ACs, it only suggests that, where there is no realistic chance of a largely competitive market, the costs of basing the delivery of social goals on artificially sustained market structures are prohibitive. The connection suggested by the third hypothesis – that is, that the more dispersed regulatory authority is, the higher co-ordination ACs become – is supported by the evidence of these case studies. The restructuring in UK electricity, the particularity of the German system, with a strong cartel office (wrestling about competences with the emerging sectoral regulatory authorities), and the influence of administrative courts in Germany have been driving ACs up, as has the disorganisation among the UK railways regulators, the SRA and the ORR. The fuel of such bureaucratic struggles are organisational strategies for expansion or fears about institutional survival. This was underlined by the expert interviews. Comparing Germany and the United Kingdom as regards administrative co-ordination ACs, and discounting for the recent changes in UK electricity, which undoubtedly will result in medium-term cost-saving pay-offs, one can expect a bifurcation. The prevailing administrative pragmatism of the UK makes it very likely that, once actors have found their role within the new institutional structures and have learned to optimise the (re)distribution of competences coming along with the sectoral transformation, these types of ACs may stabilise or even decrease over time. Such an option is not excluded for Germany either. However, the more antagonistic attitudes and the central role of the administrative courts, as strategic resources in the hands of the regulatees for influencing regulatory decisions ex post (Héritier 2001c) point to a danger: that administrative co-ordination costs will remain higher and certainly less predictable than in the UK. Moreover, these results of the analysis of ACs in the network utilities do have some other, broader implications. First, the diminishing public burden


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proposition was clearly disproved by the empirical findings. There is no sign that the sectoral reorganisations significantly lowered ACs. In fact, the tendency for higher ACs in the development of personnel in the national ministries and within the sectoral regulators is especially evident. Both classes of organisations recruited new staff and thus considerably expanded their capacities during the 1990s. Moreover, an ACs perspective on reforming the network utilities all but ends the myth that the UK would run a most efficient and lean public administration. True, in many cases the UK has been the first mover, and has thus been able to influence the reform agendas of many of its EU partners (see Héritier et al. 1996). However, as regards the network utilities, with the single exception of telecommunications, Germany has been able to establish leaner regulatory options. The United Kingdom has paid a very high price for its inclination to rely on market mechanisms, even if such mechanisms were only able to be put into practice and sustained artificially. In electricity and the railways this has resulted in the need to re-adapt at a later stage (pool/NETA and Railtrack), and it has therefore tremendously increased the public bill for incentivisation and administrative co-ordination. Thirdly, even though some convergence in the ACs of the sectors across countries can be observed, the national institutional idiosyncrasies remain effective and condition such a convergence in important ways. If we, for a moment, take the results of ACs as a measurement of the intensity of state involvement in general, which would mean that in telecommunication state involvement is lowest and in the railways highest, this correlates neatly with the order in which particular national paths remain effective. In other words – and perhaps unsurprisingly – convergence seems to come with the arrival of a truly transnational market. To sum up the major finding of this chapter: quickly introducing marketlike mechanisms in complex environments – where market forces do not have the transformatory capacity deriving from technological innovation as in telecommunications – is bound to increase ACs, while incrementally changing regulatory structures appears the safer way to keep ACs in check. In any case, the reform of the utilities in the United Kingdom and in Germany does not lower the bill for the taxpayer.

NOTES 1. 2.

One notes that administrative co-ordination is not to look at vertical implementation costs, as the classical implementation literature does, but to focus on horizontal costs of co-ordinating the involved state actors. However, after the empirical research for this chapter had been completed, the German government decided to establish such a sectoral regulator to be operative from the 1 January 2005 onwards (FAZ, 28 July 2004: 8).

88 3.


This number stands for the whole of department III of the BMWi, including not only gas and electricity units, but also results in charge of oil and coal matters. Moreover, due to a reorganisation after the 1998 change of federal government, 1–2 units from the former Ministry for Science and Research were transferred to the BMWi. These and other changes may account for 10–15 more posts and hence the net increase in the BMWi electricity staff up till 2000 can only be called marginal. 4. Peter Hain, UK minister for European affairs, has called it ‘the worst railways of Europe’ (NZZ, 14 January 2002: 14).

PART II

Business–Regulator Relationships

4. Changing business–regulator relations in German and UK telecommunication and energy sectors David Coen INTRODUCTION In light of the liberalisation of European telecommunication and energy markets, sector-specific regulation has emerged at both the national and the European level to protect consumers against possible monopoly abuse. However, the ‘Europeanisation’ of economic policy has not brought with it a concomitant harmonisation of national regulatory authorities (NRAs) across sectors or countries. When looking at the UK and Germany we are presented with contrasting cases not only in the speed of liberalisation, but also in the style of regulatory management. While independent regulatory agencies dominate in the UK, with distinct and clearly defined functions, the German regime is characterised by a strong emphasis on the role of sector-specific competition law and the procedural courts. With regulators seeking to foster competition while at the same time maintaining essential services in both regimes, we investigate how firms access and influence these emerging NRAs and the policy process, and how firms and regulators manage the day-to-day implementation of regulation. Recognising that post-delegation, NRAs had varying degrees of discretion to establish new business-regulatory norms and independence from government intervention, as well as noting that how business lobbied/dealt with NRAs had serious implications for the emergence of competition and shaping of regulatory powers in the future, we organised 50 interviews with business and regulatory officials (see Appendix for full list). In this study of business-regulatory interaction we sought to answer five key questions. First, how do firms access and influence multiple regulatory authorities at the national and European level? Second, what are the respective advantages and disadvantages of different regulatory levels (EU and national)? Third, is there a risk of regulatory institutions being played off against each other? And how does such action affect the implementation of regulatory policy? Fourth, are 91

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all the above a learning process that enables both parties to refine regulatory instruments and goals? Finally, related to all the above, can we expect to observe convergence across countries and sectors as firms and regulators learn to play regulatory games?

ANALYSIS OF BUSINESS–REGULATOR RELATIONS Studying regulation in Germany and the UK provides an opportunity to assess the impact of national attitudes to, and the extent of, liberalisation and privatisation in telecommunication and energy sectors. In taking a comparative approach, we acknowledged the specificities of each country’s regulatory institutions and traditions of regulatory practice, their political and economic legacies (Wilks 2001), their corporate governance structure, and their competition agencies (Eyre and Lodge 2000). Thus, different countries exhibit different institutional endowments, which in turn lead to different regulatory practices. Particularly important are the constraints on executive and legislative discretion that arise from different interrelationships between legislative, executive and judicial institutions. These have important implications for the legality, answerability and credibility of regulation, and therefore for regulatory risk and cost of capital. Recognising national and sector variance (see Böllhoff, Chapter 2 in this volume), we formulated generalisable propositions to explain the degree of business ‘access’ to various regulatory institutions and the behavioural criteria these institutions expect in return for ‘favoured access.’ Recognising the establishment of a regulatory relationship, we saw access to the policy process in terms of resources dependency (Pfeffer and Salanick 1978). Having analysed firms’ initial access to the multiple level and institutional regime, we were then interested in how firms dealt with the day-to-day ‘implementation’ of the regulatory relationship. Specifically, in the course of studying these implementation propositions we observed how firms evolved in, and changed, the institutional environment. Thus we examined the degree to which institutions and business learn and assess how far this learning and understanding ultimately assists regulator–business governance (Coen and Willman 1998; Wilks 1997).1 Drawing on the resource dependence approach, we argue that understaffed regulators look to firms to prove reliable information and expertise on markets, and that those firms that provide this information on a regular and reliable basis will have improved access over time to committees and regulatory information. Conversely, regulators are often faced with defining unpopular or difficult measures and must look for a credible constituency in the sector to facilitate implementation. Hence, incumbent firms are often

Changing business–regulator relations

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sought for their regulatory input (Hall et al. 2000), even if the risk of misinformation exists. However, where the market is more competitive we would argue that regulators also develop multiple sources of information (via audits and/or associations) which can be used to ‘yardstick’ and ‘benchmark’ market standards (Baldwin and Cave 2000). This information exchange becomes increasingly complex in a market with a number of regulatory authorities, with overlapping competencies, competing for information and political constituencies. Firms must choose between regulatory authorities, and in so doing influence the primacy and legitimacy of one regulatory body over another in terms of informational inputs, and undermine others through legal contests and minimal contact. This informational power in turn has implications for the discretion and independence of regulators vis-à-vis their political principals. For example, the European Commission has actively facilitated business access to its industrial policy forums as a means of legitimising its policy-making procedure vis-à-vis the European Parliament and member states (Coen 1998). At the domestic level we sought to explore the potential for horizontal overlapping competencies and gaming between the competition authorities and agencies in the UK and Germany as well as the vertical effect of EU bodies on national regulatory authorities. Thus, it is possible to argue that a number of regulatory authorities actually weaken the resource dependency between individual firms and specific regulators, as business has a number of access points into the policy process. The key in such a scenario is whether a clear demarcation is made between authorities and whether the primacy of a specific regulatory body can be identified. In resource dependency terms, business has ‘sunk costs’ in a relationship with a specific regulator in terms of reputation, expertise and understanding of the decision-making process. In playing a number of regulatory options (as legislation changes), firms must be careful not to damage their relationship with the original regulator or new authority. However, in a multiple institutional environment firms must question whether it is an optimal strategy to spread thinly over a number of regulatory options the limited regulatory resources or to concentrate resources on a single relationship. Hence, we assert that being risk adverse, firms will tend to focus activity towards those institutions that they perceive to be closest to their core competencies and institutions that have established their functions and roles over time. We explore the following propositions when examining the business– regulator resource dependence in terms of access propositions: ●

Firms offering specialised expertise and reliability are more likely to gain high access to regulatory authorities.

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Business–regulator relationships ● ● ● ●

●

●

Large firms have better access to regulatory bodies. Incumbents have better access to regulatory bodies than new entrants. Strong associations facilitate access to regulatory bodies. A regime with multiple access points and overlapping competencies offers firm’s strategic possibilities to gain improve access to the regulatory process. The discretion of the regulator to provide favoured access is a function of the number of firms in the market. Firms seek to nurture access to regulators with established reputations and long-term experience.

While Chapter 2 describes the regulatory arrangements available to new entrants and incumbents, this chapter seeks to explore the nature of business access to national regulatory authorities. We recognise that this regulatory relationship is evolving and developing on a ‘day-to-day’ implementation bases. Thus understanding of institutional and business learning is important if we wish to understand questions of the burden of regulation on the administration and the cost of regulation on firms. From this perspective, we are interested in whether firms learn from their mistakes, whether they can avoid regulatory clashes and if there is a best way to manage exchange of information and regulation. Drawing on the theory of institutional isomorphism (DiMaggio and Powell 1983), we can see that institutional constraints (coercive isomorphism) such as clearly defined regulatory goals and institutions will define how firms organise their regulatory affairs in the early stages of a regulatory relationship. For example, if the regulatory emphasis is on contract compliance the regulatory–business relationship is likely to be legalistic and perhaps confrontational; however, if the initial emphasis is on allocative efficiency gains and required heavy auditing it is logical to expect the department to be located in the financial department. What is clear is that the style and professionalisation of the regulatory affairs office has evolved over time as firms have adjusted to the institutions and the changing emphasis from ex ante to ex post regulation (Coen and Willman 1998). How firms adjusted can be explained in terms of mimic isomorphism, for example, as some firms achieve greater success than others, through trial and error or strategic foresight, they will act as role models for other firms. Assuming that firms do not wish to be strategically disadvantaged, they will adapt their behaviour accordingly and as a result a best practice or regulatory norm becomes established within a specific regulatory regime. What is less clear is whether these regulatory business norms are transferable across borders or across sectors and are the mechanisms of learning the same under different institutional regimes? Can we see generalisable convergence on concepts


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like trust and understanding or are some regimes inclined towards litigation and conflict? Given that asymmetric information exists between the regulator and regulatee, we can expect that firms will exploit their advantage.2 However, as regulator–regulatee relations developed, it is possible for the regulator to monitor and identify firms that either failed to provide reliable information in review periods or failed to comply with regulatory agreements. Thus, seeing access to regulators as a function of an ongoing implementation and monitoring process, it is logical to expect non-compliant firms to be penalised and excluded from the regulatory process. Moreover, within this ongoing regulatory game we would expect that regulators would learn to improve informational-gathering devices, such as yardstick regulation and benchmark audits (Baldwin and Cave 2000). Firms, in turn, react to these changes by developing new regulatory strategies to deal with the increased auditing loads and more critical regulators. Accepting that organisational learning is the acquisition of understanding, know-how, techniques and practices, we assume that firms and regulators learn to manage their relationship via two mechanisms. The first, trial-anderror, sees that the likelihood that a regulatory method will continue is increased if there are few regulatory conflicts and both parties associate the method with success. An example of this is the efficiency goals of the UK’s RPI–X reviews which have taught business to outperform price caps by reducing costs for the first three years of a review, but then reducing cost savings in the final years of a review period. Such action means that the new price cap X value is calculated at a more favourable level for the second four years (Parker 2004). The second mechanism sees actors drawing from a pool of alternative routines, adopting better ones as they are observed . Here the rate of discovery is a function of the size of the pool of options and the intensity of the search. In terms of regulation we can therefore see learning as a function of business regulatory clashes (creating the intensity) and numerous institutions offering alternative learning options (see Bauer, Chapter 3 in this volume). Add to this the input of new entrants from established regulatory regimes and the pool of informational options increases dramatically. Accepting that both parties are learning and changing their behaviour accordingly, it is important for long-run regulatory relationships that some ‘stable givens’ are accepted as part of the regulatory regime (Veljanovski 1991). From the perspective of the firm, changes in the normative goals of the regulator should, where possible, be generated by economic and rational considerations rather than those of an administrative and political nature. However, just as firms’ relationships with the regulator changes over time, the independence and political accountability of regulators alters (Baldwin and Cave 2000; Thatcher 1998). For this reason, it is logical to assume that

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business monitors the wider political environment and should where possible establish vertical and horizontal representational links to regulatory authorities. Drawing on the concept of learning, we assume that implementation is not a static game. Hence we have attempted to explore the following implementation propositions: ●

●

●

●

●

●

●

●

The firm will exploit the informational asymmetry between regulator and firm to reduce the cost of regulation. The regulator is aware of the informational asymmetry and seeks devices to increase his or her information. If the level of performance of the firm is judged as unsatisfactory, the regulator seeks to change regulatory terms. A regulatory structure with multiple authorities on the vertical and horizontal level offers the firm more strategic possibilities to reduce regulatory costs. A single independent regulator is able to guarantee a more stable relationship with the firm. The regulator changes contracts if there is a change in the government and political guidance changes. A market structure with multiple players allows the regulator to reduce the informational asymmetry by comparing performance. Where performance of regulatee is judged unsatisfactory, the regulator seeks to change the terms of the contract.

While some of the propositions are ultimately collapsible we set them out below in our general discussion. Specifically, in attempting to explore what we term the ‘degree of access’ and ‘implementation’ propositions in each country, we held sector features constant and initially explored the variables of size and type of firms. However, in the conclusion to this chapter we attempt to make broader assertions as to the degree of convergence and divergence in sectors and countries.

EMPIRICAL RESULTS: BUSINESS–REGULATOR RELATIONS Telecommunications UK Access to regulatory process

Raising first the question of level of access to


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the regulators, it emerges that in the highly competitive and internationalised telecommunications sector, firms navigate between open national and European authorities. However, in line with subsidiarity and business preferences, the primary focus of activity is at horizontal national level, where NRAs have taken responsibility for issues that impact on the core competencies of business. In particular, OFTEL was seen as the primary institution that telecommunications providers could deal with on price, access and social regulation issues. Most importantly, firms recognised that the director-general had a large degree of discretion over how he defined and created competition and the level of inclusiveness in the consultation process (Stelzer 1996; Thatcher 1999a). This discretion and independence, while clearly set out in the Telecommunication Act, has evolved through regulatory precedence and the gradually managed interaction with business (Coen and Willman 1998). Recognising the importance of regulatory governance, firms of all sizes have developed regulatory competency for dealing with OFTEL and OFT. Some, like BT, have developed dedicated specialist regulatory groups of 60 or more individuals, while small new entrants often make do with one of their contract lawyers. Such inequalities in resource allocation, however, must be seen as a function of the regulatory demands placed upon the firm. A large incumbent will have to face regular price reviews, access pricing issues and questions on unbundling the local loop, in addition to developing their new markets and licence requests. The small entrant, on the other hand, having made the initial licence request, may actually enter a competitive marketplace where legal counsel at the appropriate competition authority will suffice. The last point illustrates the potential for alternative regulatory focus in a multiple regulatory institutional environment. In the UK, as regulation matures, patterns of ownership change and controls begin to cross boundaries between sector regulators and competition authorities, it is crucial that competition laws and single utility sector goals are established. Even so, in establishing a new Competition Act, doors have opened to potential regulatory shopping by firms. Alive to this risk, OFTEL issued a statement about the joint working of regulatory bodies (interview OFTEL, March 2000). Though [at] the end of the day every case is determined on its specific facts. We have said, that we will start from the perspective that if you can do things under the Competition Act, we will. That is a statement of principle. In those areas where it could be either, OFTEL’s preference is to start off with the Competition Act. (Interview OFTEL, March 2000)

Significantly, while OFTEL uses competition law, it tries to make a clear and transparent demarcation as to which agency (OFT or OFTEL) takes the

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lead in investigating a particular infringement through what is called the concurrent working party (CWP). Instead of competing over who will monitor an issue, it is in fact the other way round, with OFTEL and OFT co-ordinating which body will investigate. In cases where a firm tries to play the system and go to only one of the two institutions, the one will inform the other. As a result OFTEL now tells companies that they should formally contact OFT for public accountability purposes, but at the same time should also contact other appropriate agencies, as this saves time, as all the agencies will co-ordinate (interview OFTEL, March 2000). In this way, for concurrency to work effectively, both institutions must be kept informed of the other’s initiatives, to avoid business circumvention and the development of understanding and the goodwill between institutions (Riley 2000). As noted above in such a competitive regulatory market with a number of firms and regulatory authorities with overlapping competencies, the need for information and political constituencies grows. Firms must choose between regulatory institutions to allocate their expertise and information, and this in turn has implications for the primacy of one regulatory body over another in terms of informational flows and legitimacy. Thus we can see resource interdependence between firms and regulators, whereby understaffed regulators look to firms to prove expertise on markets in return for improved access over time to the regulatory consultation process. These synergies were magnified, if we accept that regulators were often faced with defining unpopular or difficult measures and had to look for a credible constituency in the sector to facilitate implementation. Hence, incumbent and large firms were often sought out for their regulatory input, even if the risk of misinformation and capture existed (Hall et al. 2000). Conversely, as we will see in the next section, we could argue that where the market was more liberalised and potentially competitive, regulators have been able to develop multiple sources of information (via audits and/or associations) so as to yardstick and benchmark the market. In vertical institutional terms, at EU level, all the incumbent telecommunication companies and larger new entrants established Brussels offices to monitor EU directives and lobby the European Commission and European Parliament consultation processes. However, small new entrants, due to economic and staffing constraints, tend to favour occasional Brussels trips and use of national and European trade associations. However, while large firms have a location and resource advantage the European Commission can be seen to be open to all economic and social interests and, when fostering market liberalisation, is sympathetic to the positions of new entrants. This would tend to confirm the proposition that while large firms with a dominant market position have potentially better access to the European policy debate their influence cannot always be taken for granted and that in the


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telecommunications sector there appears to be a more level playing field at the European than at the domestic level. Significantly, in terms of regulatory competition between the EU and national authorities, we found that firms consider it an advantage to play on the differences between NRAs and European Commission (interview telecommunications company, January 2000). This willingness to use other European regulatory authorities may, however, be a function of the distances from the national markets. This distance means that firms can play institutions against each other without permanently damaging domestic relationships. From the national regulator’s perspective it was a concern: ‘of course people are coming and saying – the German regulators decided this, the French one said that, why are you not doing the same’ (interview OFTEL, March 2000). In terms of the EU regime, in the search for regulatory consistency, the creation of a European network of NRAs has been seen as a positive development. As one regulator noted: We might have a debate on how we decide to act in different situations. In general, regulator-to-regulator, they are not too upset if you don’t do the same thing as long as you see that people are pulling in the same direction (i.e. opening the market). There is regulatory learning. (Interview OFTEL, March 2000)

But significantly, business also looked favourably towards the creation of EU/NRA procedural ‘best practice’ and norms within the single market (Coen and Doyle 2000a: 455–76). However, while identifying best practice and regulatory goals, the network is not attempting to establish a single regulatory model or a European agency. Rather, the national regulators appear to recognise the importance of national variations as OFTEL observed, ‘I am sure that the regulators in the other countries … do not want to fit into one model. We as OFTEL are not the only models’. Instead, it is believed that the regulators themselves can play an active part in counteracting the information asymmetry without creating uniformed solutions. As OFTEL observed: We do play an active part in terms of the international regulators group. They (other NRAs) want to learn from us. Our web site is heavily searched by European regulators and (foreign) telecom players. They are interested what OFTEL was doing in the UK. We try to keep closely in touch with the EC. (Finally) what ever comes out (of the EU) has to be applicable to the (UK) system that is 16 years old. (Interview OFTEL, March 2000)

However, while the regulators and the Commission co-ordinate to limit the opportunities to play them off against each other, we must recognise that the existence of a multi-level authority widens the strategic possibilities for national actors.

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The importance of trade associations, while critical in Brussels and the German regulatory process, are less significant in the UK firms. While accepting the limits of resources, especially for new entrants, it was recognised that one-to-one representation was the most effective means of ‘accessing’ and ‘influencing’ the domestic regulatory process. Nonetheless, firms of all sizes used associations to enhance their leverage in seeking access to European regulation, as direct lobbying of EU Institutions will be of limited success if expertise, reliable information provision and European credentials are not established (Coen 1998). For this reason, even large firms with good direct access to EU officials continue to utilise their EU federations and seek to establish cross-border alliances when making representation. However, with the large increase of new entrants into the market and the disaggregating of the telecommunication market, the nature of the traditional trade associations and the sector cleavages has changed. The traditional federations became ‘lowest common denominator’ policy-makers, and as a result a number of new federations have grown out of the niche markets and new technologies. For example, the cable firms have established the Association of Private European Cable Operators (APEC) while also participating in the European Telecommunications and Professional Electronics Industry (ECTEL), and the Comité Européen des Equipements Techniques du Bâtiment (CEETB). These new associations and industrial groupings are of importance to both the new entrants and small operators as it allows them to gain critical mass in the policy process. Within this competitive environment larger firms have led the way in the formation of new specialised sector associations and have also sought to utilise their complex network of joint ventures and cross-border holdings to create European collective identities and credible lobbying mass for themselves (interview telecommunications company, January 2000). While sophisticated, this new ‘issue network’ building is not unique to the utility sector and EU regulatory lobbying; rather, it is a broad lobbying phenomena observed across most sectors in Brussels, regardless of the firms national origins. The logic is that these new ‘issue alliances’ are the development of more focused and quicker resource exchanges between the Commission and business in the highly competitive European markets. Finally, one interesting alliance at the EU, noted by BT and OFTEL, is the potential for the occasional co-ordination of a national position. As OFTEL noted, when asked about the potential for NRAs and firms to go to Brussels together, ‘we will do it if it is right for the national market, not because it was BT [British Telecom]! We would do it with other companies if appropriate’ (interview OFTEL, March 2000). BT noted that there were occasions during the consultation process for the telecommunication directive when OFTEL and BT worked together for liberalisation (interview telecommunications


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operator, January 2000). Significantly, however, neither authority nor business claimed to push the UK regulatory agency or economic model. Managing implementation The biggest problem facing national regulators in the day to day implementation of regulation is overcoming information asymmetry. Over the 16 years since privatisation, there has been a high degree of regulatory learning on behalf of OFTEL and the regulatory affairs teams of telecom companies. These firms have recognised that while they may achieve an undervaluation of an X factor in one price-cap review period, the regulator will over time recognise misrepresentation and may censor the firm in the court, via increased auditing and informational demands or restricting access to future consultations processes. Hence, it is clear that a game of reputation is in place where actors are aware of the risks of misinformation (Coen and Willman 1998). The importance of reputation is particularly important in the UK telecommunications sector where the regulator has significant discretion as to who is ‘actively’ involved in the consultation process and an increasingly wide selection of firms to use for information gathering. This discretion has been used as a tool or a sword to reduce business temptation to misrepresent or to fail to comply with regulation, but it is also seen as a very nontransparent means of regulation and is perhaps hard to replicate in other European countries which are perhaps more rule based (interview OFTEL, March 2000). Consequently, in OFTEL, we had a single sector regulator with primary competencies for the creation and monitoring of markets and secondary regulatory institutions, like the OFT which monitors competitive principles. Owing to a high degree of liberalisation and regulatory competition, the pre-1993 situation when a policy triangle of OFTEL, the government and BT dictated UK telecommunications policy has now been consigned to the past (Hall et al. 2000). Moreover, while initially OFTEL distanced itself from BT by threatening to refer uncooperative behaviour to the MMC, ultimately the threat of a break up was enough to alter BT’s behaviour (Veljanovski 1991). Thus by the late 1990s OFTEL was able to limit regulatory threats of referral, and primarily used regulatory benchmarking to identify regulatory avoidance or ‘shirking’ (interview telecommunications company, May 2000). The success of the discretionary regime has clearly been a function of the independence of the regulator and the credibility that this brings to the RPI–X incentive structure. In the UK price model, firms are encouraged to find efficiencies under the RPI–X price cap, and can maximise profits for the period of four to five years until a new price review. This efficiency drive requires that firms believe they can keep whatever profits are made and can distribute profits as dividends, bonuses or reinvestment as they wish. The heated policy debate that surrounded the Energy 1998 White Paper on utility

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regulation,3 which suggested that ‘windfall’ taxes could be introduced, illustrated the risk of politicising the regulatory process. Significantly, in this debate OFTEL and business appeared to be in agreement, claiming that consumer interests were protected by the increasing competition in the telecommunications market and that in areas of incentive price regulation ‘clarity’ of procedure was required. Both new entrants and incumbents seemed united in their reluctance to political intervention in the regulatory process. Thus, in terms of our assumptions, firms would argue that an independent regulator is more able to guarantee a stable contact with the firm and that political uncertainty may create incentives for the firm to shirk its duties in contract compliance and information provision. Finally, we must not lose sight of the fact that an increasingly large percentage of the market in telecommunications is competitive and as a result, the rationale for market creation and correction regulation is harder to sustain. With the creation of the new multimedia regulator, OFCOM, in 2003 it will be interesting to see how much of the market will be subjected to new political pressures in line with universal services provision. The independence of the new regulator may also be influenced by the creation of an independent regulatory commission rather than an individual director-general – as accountability upwards to the government is diminished and control downwards to the regulatees confused. However, while political pressure will grow, it is significant that the stated desire of the new chairman is to continue open and transparent dialogue and regular consultation with business in order to facilitate competition and understanding. Germany Access to regulatory process In comparison with the UK, German regulatory institutions are governed more by rules than discretion. Most significantly, we see a number of concurrent powers between regulators and cartel office, which create problems of demarcation and access for firms at the horizontal national level. Under these conditions of uncertainty we recognise that numerous appeals at the procedural courts and cartel office will occur and that the initiation of policy would be slowed down. Moreover, such adversarial litigation will act as an entry barrier to many new entrants (interview telecommunications company, March 2000). Under these multiple access conditions, and within a young and evolving regulatory environment, firms are attempting to establish and frame the rules of engagement with regulators. At present, incumbents and new entrants believe that they have reasonable formal and informal access to the RegTP, however, the question they ask is, ‘how open and transparent should this access be?’ (interview telecommunications company, February 2000). What is


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more, because of the importance of the telecommunications and competition law and procedural courts, many of these business–regulator exchanges have been played out openly in the courts, where access is a function of funds to pay a case. As one new entrant observed ‘it is quite a confrontational system. We spend more than 300–400 000 DM per year on external lawyers just to get our suits before the courts and the RegTP’ (interview telecommunications company, March 2000). With the RegTP there is an institutionally constrained quasi-independent regulator seeking to establish itself in an innovative and increasingly competitive market. For the RegTP decision-making, the ministry (BMWi) and the Federal Cartel Office (BKartA) play a decisive role. Companies point to the fact that it is an ‘open secret’ that the BMWi overshadows the RegTP and interferes where necessary (interview telecommunications operator, August 2001). New entrants are especially unhappy with this influence: they claim that the ministry influences decisions in favour of the Deutsche Telecom AG, where the German state still owns 43 per cent of the stakes. Thus, as the RegPT shares responsibilities with the BKartA, there are attempts to activate the BKartA to constrain or influence the RegTP’s decisions. Dissatisfied with the decision-making of the RegTP, the Association of the Providers of Telecommunications and Value Added Services (VATM) recently argued in favour of more closely involving the BKartA, in order to use BKartA’s knowledge to optimise decision-making. Because of the speed of change in telecommunications technology and in the market, the regulatory emphasis has been on the policing of competition and the unbundling of services on the local loop. This has brought the RegTP into conflict with business, with the new entrants claiming that it is toothless and incumbents seeing it as a time-consuming monolith. However, for all the dramatic headway in the liberalisation of the German telecommunications market, DTAG still maintains a dominant position as a service provider and can potentially act as a barrier to entry in the area of network access. While the demarcation and levels of access to domestic institutions is yet to be resolved, it would appear from our interviews that German firms are very comfortable interacting at the European level and have developed a high level of visibility (interviews telecommunications company Brussels, March 2001). This can be explained, in part, by the fact that German government has been successful in shaping EU liberalisation directives and competition policy (Eyre and Sitter 1999) and the RegTP has been active in the new high-level regulatory group (interview telecommunications company Brussels, March 2000). As a result, large firms with a long tradition of dealing with the cartel office are comfortable with the issues and definitions of anti-trust behaviour addressed by DG IV. Traditions of collective action and conciliatory capitalism have also been advantageous in Brussels, where much emphasis is

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placed on establishing the reputation of the firm in the appropriate federations and associations. Finally, with increased merger and joint venture activity in the German marketplace, many of the largest German telecommunications players have a significant pan-European presence and have developed good direct access to the Commission officials in the telecommunication directorate (interview telecommunications company Brussels, March 2001). From the above, we could make the case that large German firms have the potential for good access to the Brussels regulatory debate. Nonetheless, DTAG questioned whether being an incumbent was an advantage. ‘We see resistance in Brussels, as far as the typical incumbent positions are affected. Commission officials tell me: you don’t even have to talk about this, because I know what you have to say and don’t care!’ (interview telecommunications company, February 2000). This quote illustrates dramatically that, while size may provide firms with potential access and profile in Brussels, the strong discretionary powers of the EU can still facilitate access for new entrant positions. For this reason, larger firms, whether incumbents or new entrants, have been proactive in establishing relationships with Brussels offices to try to co-ordinate sector and/or national positions. Even so, operating effectively in Brussels and being comfortable with increased Europeanisation of regulatory affairs, are two distinct propositions. Both large and small firms were unanimous in seeing risks in a single European regulatory agency or even increased competencies for the Commission vis-à-vis the national regulators (interviews incumbent and new entrant telecommunications companies, February and March 2000). However, as DTAG noted, it was widely recognised that more co-ordination between the national and EU regulators was needed to reduce variance in implementation of EU liberalisation directives and the creation of a level playing field. One established medium-sized firm expressed a desire that the new regulator group, High Level Communication Group (HLCG), as proposed in the EC 1999 Telecommunication Review, would establish a degree of uniformity in goals, while allowing for important national institutional variations (interview telecommunications operator, February 2000). However, the general business view was reluctant for any additional institutions at the EU level. As one firm observed ‘The creation of an EU regulatory authority would not make things better, (rather) it could would even make things worse, because an additional layer would not mean further competencies but it would just lead to additional bureaucracy’ (interview new entrant, February 2000). This sentiment is driven by a belief that the telecommunications market will continue to liberalise and that competition will open up new markets. Accepting that competition is the end point of the market, business is therefore reluctant to establish agencies that may be difficult to ‘get rid of’ at a later date.


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In sum, at the EU level, German firms, regulators and politicians were very reluctant to accept the December 2000 telecommunications review with its emphasis on clause 6 which gave the Commission greater ‘clawback’ powers. It was felt that this was an attempt at EU-led regulation of domestic markets, as the Commission would have final decisions and, where necessary, would require the national regulatory authorities to amend and redraft proposed regulatory measures. If this did become the case, firms would have to change their emphasis and access strategies when lobbying Brussels forums (interview telecommunications company, March 2001). Managing implementation In learning to manage asymmetric information in a young regime, all firms argued that building firm-level regulatory competencies is important, as day-to-day contact with the RegTP is creating huge informational demands. DTAG estimated that it spends 300–400 hours a month attempting to make direct contact with the RegTP, and employed over 80 people in the regulatory affairs office. This compares very favourably with BT, but vastly outstrips any of its domestic rivals, with companies like a leading telecommunications operator mobilising 10–12 people and new entrants only dedicating part of one person’s time. Clearly, then, large firms and especially incumbents have a strategic advantage in accessing the regulatory institutions based purely on physical resources they can mobilise to address the informational demand of regulators. Significantly, while the interviewees noted the ‘weakness’ of the RegTP and the need for more power vis-à-vis the BKartA, all recognised it as one of their focal points of regulatory contact. In the case of the incumbent, the primary activity at the RegTP was the reaction to competitors’ complaints on the misuse of monopoly power and the unbundling of the local loop. However, for all the recognition that the RegTP is providing an important function, there was a deep-seated belief in the sector that the BKartA provided an important role in the ex post regulation of the sector. For example, a new entrant observed, We are very happy with the BKartA. In principle, for the ex post part, the RegTP does exactly the same as the cartel office. RegTP has three chambers. Two deal with ex ante control issues, and the third with ex post regulation. The working relationship is that the case has to be brought to this chamber three and the cartel office does not say anything to it. They get to see the final decision, make some comments on it, but they do not have the right for veto. If it is a sector-specific regulation the RegTP has the last word. (February 2000)

Company X would, however, like to see the experience of the cartel office brought in as a counter-weight to the weak and politically pressured directors of the RegTP. However, DTAG went further claiming: ‘We have always

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argued that sector regulation is not needed. We have a fundamental position that regulation belongs to the cartel office’ (interview telecommunications company, February 2000). When asked if this use of the court would make the German regulatory regime too confrontational, one large firm replied: I am not sure; first, if you look to other utility markets, like the electricity, you have an institutional arrangement like that: no sector specific laws, no ex ante price control, no sector specific regulation and institution. And the cartel office is absolutely clear that they can use their new Article 19 GWB to exercise power. (February 2000)

When questioned as to the speed of the court process the firm elaborated that after pilot cases, the industry would recognise the signals of the cartel office (interview telecommunications company, February 2000). However, new entrants were aware that with the BKartA, you have ex post regulation. You always wait, until the incumbent does something, and then you complain. We have seen DTAG employing people … thinking about hampering competitors. We are in desperate need for ex ante control. I am glad that we have the regulatory agency. It turns out that DTAG has some trouble getting approval for all their prices and other things. (Therefore), they make a strong political effort to decrease the amount of regulation. Of course, we on the other side claim for more regulation. There is a political discussion going on right now. (Interview new entrant, March 2000)

Political guidance is highly significant in the German regime, as the incumbent is still partly owned by the government. This has implications for the way that competition is introduced in areas like cable or access to local loop, where DTAG still has to recoup its capital investment, as the government is aware of the share price value. Concerns have been raised as to the independence of the RegTP management vis-à-vis government, especially after the appointment of Matthias Kurth a high-level Social Democratic Party (SPD) politician. Moreover, with policy shifts at the EU level and the public goods concerns over the ‘information society’ and access to the superhighway, the risk of direct political intervention has increased. The discretion of the RegTP is also restricted because of traditional ministerial and informal links to DTAG and Deutsche Post. The relative youth of the RegTP was clearly a significant limitation to the development of strategic interaction between regulators and firms. As the above points show, the risk of political intervention illustrate that the interviewees have limited confidence and trust in the regulatory regime. As a result of limited trust and doubts in the RegTP’s ability to maintain independence, incumbents and new entrants have tried to established the rules of the game themselves (within institutional and legal constraints) and have


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attempted to understand the nature of the decision-making process. This limited confidence was reinforced by the fact that the RegTP was perceived to have limited transparency, and that it demanded too much information.4 For example, one large firm, after providing a 700-page report on unbundling the local loop, answering hundreds of questions and exchanging thousands of pages of comments, claimed that at no point did they know what was important to the regulator. Then, three days before the final decision, the regulator drew out two academic studies that were unfavourable to the firm. The point made by business was that it wanted all the information in the decision process to be transparent so that counter-arguments could be developed (interview telecommunications company, February 2000). Another recent example of problems arising from lack of transparency occurred in the unbundling of the local loop. Here, the RegTP ruled that new entrant had to pay DM25.40 to DTAG, when they were expecting a figure below DM20. The new entrant complained, but the reasoning and information was not made public. Suspecting that it may have been political pressure from the minister for economics, the new entrant took the RegTP to court. Yet, when the lawsuit arrived in court, the Ministry for Economics successfully blocked the judges access the RegTP files. In parallel, DTAG took a case (and won) against the RegTP, which stopped the RegTP disclosing its information. The new entrant then sued the Ministry of Economics, to allow the price documents to be made publicly available to the judges – which the new entrant won in April in the Cologne regional courts (interview new entrant, March 2000). This case has huge implications for the strength and independence of the national regulators and shows how business has attempted to frame the regulatory regime’s development. It also illustrates well how the courts in Germany have been brought in as referees. Amazingly, the new entrant claimed that at present 75 per cent of all the regulatory decisions he is dealing with are disputed in the courts by themselves or DTAG (interview new entrant, March 2000). Thus, as a new entrant observed, in the end it is a question of reputation. That is the difference between the cartel office and the RegTP. The Ministry of Economics is head of the cartel office as well, but there have only been a few cases where the ministry has influenced the cartel office. The ministry has no problems with influencing the RegTP, but they would never influence the cartel. It will probably take ten years to build up a strong independent authority for the regulation of telecommunications and postal issue. (Interview new entrant, March 2000)

The successes of this transition period will, however, also be contingent on strong individual and independent regulatory directors being placed in the three chambers of the RegTP.

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The rigid and legalistic German regime would appear to limit the RegTP’s ability to take a more proactive role in framing its own regulatory function. Again age must be a consideration here, as the RegTP still has to clearly define its current role before projecting it into the future.5 That said, regardless of the merits of ex ante and ex post regulation for telecommunication, there is a consensus in the German sector that the existence of multiple institutional agencies cannot continue as it provides for too much regulatory gaming between firms, institutions and government. In the future, industry would appear to favour the introduction of a non-sector regulatory regime. As one firm observed, ‘The regulator has a personal staff of 2700. There are 2500 for technical regulation. This will be needed always. Two hundred of which are dealing with sector specific regulation. In the future you could place them in the cartel office’ (interview new entrant, February 2000). This, it is believed, would provide the sector expertise to deal with the transition to competition and the management of regulatory bottlenecks, while allowing the remainder of the market to operate in a competitive environment. In terms of our assertions, we can say that where high distrust and ambiguity about the goals of the regulator are observed it is highly likely that we will see high non-compliance and withholding of information. However, whether the German telecommunication sector will give the RegTP time to assert itself and establish norms or whether it will succeed in introducing negotiated access agreements and competition policy is harder to assess. Energy UK Access to regulatory process In both electricity and gas, the regulators are charged to promote competition, and have a shared common view of the appropriate industry structure to achieve this. This structure involves vertical separation of the transmission, distribution and sale of energy. The aim of the UK regulatory regime was to minimise the extent of monopolistic business practices, by creating competitive supply selling and trading businesses. The structures of the competitive aspects of the market are left to market forces, subject to the usual constraints of competition and merger policy as outlined in the Competition Act 1998 and the Utility Bill 2000. However, few doubt that the complexity of the UK regulatory regime is increasing at the same time that competition is being realised in certain aspects of the market. In line with the other sectors and the concept of subsidiarity, national regulation is still considered the primary focus of firm-level access and activity, and formal direct access is guaranteed through participation in the normal consultation procedures of OFGEM.


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As in telecommunications, it is clear that informal interaction and discrete exchanges of information are of paramount importance to the success of the UK regulatory regime as well as firm-level access and influence (Coen and Willman 1998; Stelzer 2000). It was evident from our study that this informal access was facilitated by having a single dominant regulatory authority like OFGEM that has had time to establish relationships with active policy-playing firms (Coen and Héritier 2000). The high levels of regulatory discretion by regulators at all levels means that it is hard to quantify who and what facilitates improved access and influence. However, as we noted above in the discussion about implementation, information and trust are key variables for a successful UK access strategy. At the European level, business has developed direct and indirect access routes to the European Commission and the European Parliament. In line with the Commission’s desire to create inclusive consultation processes for economic and regulatory interests, a number of energy policy forums have been created (Coen and Doyle 2000a; Coen and Héritier 2000; Eberlien and Grande 2000). At the Florence electricity and Madrid gas forums, large incumbent firms have been invited to participate along with their trade associations and national regulators. In addition to these biannual forums, large incumbents, like British Energy, have European affairs offices, which monitor and comment on legislative drafts at the Commission. In establishing direct lobbying capabilities, these firms can be proactive in their involvement in the development of EU energy directives, and develop goodwill over time with Commission officials and adopt consistent positions in member states (Coen 1997; Levi-Faur 1999). As one director of a large UK firm noted: I do (work) very closely with the Brussels office. We have a very weighty lobbying position in Brussels and certainly draw on that. We have a government and public affairs team, which are stronger and weaker (across Europe). We have a strong presence in Brussels, Spain, Germany and Netherlands. So I’m trying to push out, roll out our message in Europe, we are looking to use that presence. (Interview energy company, January 2001)

However, caveats exist as to the degree of direct access available to firms in the open and transparent Commission consultation procedures and the degree of influence that individual large firms can establish. First, the Commission recognises the benefit of EU collective positions and therefore encourages firms to participate in the European and national associations. Second, due to the diverging interests of national network providers, suppliers and traders, a number of new niche associations and industrial alliances have evolved in recent years. For example, new entrant trading companies have created industrial alliances like the European Federation of Energy Traders (EFED) and network providers have created a splinter group from the

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European Electricity Federation. Moreover, because regulatory solutions and speed of liberalisation has varied in the member states, most national trade associations have established offices in Brussels (interview energy company, January 2000). While incumbents appear to have strategic advantages in mobilising, in terms of direct representation as well as invited memberships of forums and participation in a creation of federations, new entrants are favoured by the Commission’s desire to liberalise the European market and therefore receive a favourable ear. In the energy sector we observed a high degree of multiple-level regulatory action between firms and national and European regulatory authorities. Significantly, in the UK, Europe was seen as a natural partner to both OFGEM and firms in the regulatory process, as the general direction of EU regulatory principles were in line with UK policy. In terms of EU access strategies and national regulators, OFGEM, while not the official ‘voice’ of British business in Europe, does consult, mediate and inform firms about the position of directives, and is, together with the DTI, an important source of information for the smaller companies. Finally, in the multi-level access environment, it is worth noting that while the EU is seen as an important element in setting principles of utility regulation, there was no desire for an EU regulatory agency. As one Brussels based regulatory affairs manager noted, ‘There is definitely no sympathy within member states towards a European Regulator’ (interview telecommunications company, March 2001). Managing implementation Accepting that non-compliance was a function of informational asymmetries in the regulatory regime and inconsistent incentives for business, our study sort to assess how the regulatory players adapted and overcame these constraints. It has been argued that the initial regulatory tools bequeathed by the government to the regulators were woefully inadequate, especially since the government paid little attention to the restructuring of the energy sector to encourage competition (Stelzer 2000). This structural problem was compounded in the early days as regulators had limited resources and expertise accurately to calculate the appropriate RPI–X and few could envisage the political consequences of an efficiency formula that placed few constraints on the profits of the new monopolies. Even today after the break up of BG and the lessons from regular regulatory price reviews of the competitive supply and distribution market, firms (RECs) still continue to have informational advantages. In this nonco-operative environment regulators have gradually attempted to establish informal information exchanges, yardstick regulation and increasingly cost-plus regulation. It is hoped that the constant contact with a single-sector


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regulator creates a reputation game between firm and regulator, which over time helps both the monitoring and creation of regulation. In other words, a relationship of trust develops between regulator and regulatee, which creates potentially a win–win regulatory environment (Coen and Willman 1998). However, the disadvantage of having such a discretionary regulatory environment is the risk of inconsistent and personalised judgements changing with each regulator (Thatcher 1998) and an overdependence on specific individuals in the regulatory community. This independence and discretion of UK regulation is an extremely important observation in the distribution market, especially when one considers the small size of most regulatory teams and the bad publicity of the sector in the late 1990s. A survey, by the London Business School, of regulation departments’ size and career paths showed that the average number of staff of RECs was about five people. The team usually consisted of a senior director, a couple of economists and lawyers and, occasionally, a technical engineer.6 However, during a price review, teams will often grow fourfold as technical requirements and regulatory intrusiveness increases. Nevertheless, it is the day-to-day contact that builds up the credibility of a firm’s position vis-à-vis rivals and goodwill that lends weight to information provided. In the case of the electricity sector, the establishment of goodwill today is very important as many firms outperformed their not very onerous early price caps. In fact, RECs were widely perceived by the public to be fat and lazy monopolies, with directors receiving inflated salaries and consumers receiving overpriced electricity (Wilks 1997). It was this perception that led to Labour introducing the windfall profit tax in 1997 and the reorganisation of the sector’s regulatory goals with the Utility Act 2000. During the recent price review, 2000/01, many firms complained of high informational demands placed upon them and the incompatible attempts to yardstick different regional companies, which can be traced back to their earlier attempts to mislead the regulators on cost functions and potential performance gains. However, while the regulator can create potential regulatory games in the gas and electricity distribution markets, the energy sector still has problems of regulated access to network transmission, as the regulator is dealing with a monopoly supplier of information in gas and electricity. New entrants in both sectors clearly want to continue with ex ante regulation for third party access agreements, while the natural monopoly providers have gradually accepted that they too have political and regulatory responsibilities (interview energy company, March 2000). Businesses’ recognition of the increased politicisation of regulation has been brought into sharp focus with the introduction of the Utility Bill 2000. The 2000 Utility Bill, while not as sweeping as the proposed DTI 1998 Green Paper, continues to place emphasis on competition wherever possible and firm

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and fair regulation in all other instances. Yet, there is also a realisation that those companies responsible for the monopoly part of the business, like Transco, the NGC and the distribution companies, will, for the foreseeable future, remain regulated. But perhaps most significantly for regulator independence, the government has requested that consumer interests need to be monitored explicitly. This may have long-run effects on the firm–regulator relationship in terms of regulator credibility/ability to deliver on negotiated agreements (interview incumbent, March 2000). Finally, there are potentially high-level tensions between the aim of promoting competition (consumption) and the new thrust of environmental policy towards controlling greenhouse emissions in line with international agreements. With respect to the proposition that multi-authority structures make the monitoring of compliance more difficult, we find that, while there was potentially some conflict of interest between the OFT and OFGEM, in reality clear demarcations are in place. OFGEM acts on the basis of the Energy Act and is the dominant institution in regulating energy and monitors competition in the sector. The OFT only intervenes in the most overt anti-competitive cases. Significantly, institutional processes have been put in place to establish dialogue between the two regulatory bodies and to avoid double jeopardy (interview OFGEM, March 2001). Similar procedures have evolved at the European level where dialogue at Commission energy and competition forums helps avoid conflict and confusion. However, as EU competition increases as demonstrated by recent takeovers by Electricité de France (EDF) and energy operator E.ON, this potentially new regulatory level may come to play a greater part in the regulatory games of firms and NRAs. Germany Access to regulatory process Significantly, formal access to negotiations for access rights is not an issue in Germany, but a fair price to the supply networks often is. Structural advantages for vertically integrated energy incumbents mean that questions of market power arise in terms of the risk of cross-subsidies and equitable contract negotiations. In terms of access to the regulatory process being a function of expertise, reputation and experience, incumbents had the most favoured position in the early rounds of the associations agreement (AA) with representation via the VDEW, the VIK, the BDI and their traditional close contacts with the BMWi. For this reason, formal business representation via traditional corporatist arrangements were instrumental in the foundation of the AA but, significantly, the BMWi failed to take account of new industrial interests such as the energy traders, new entrant suppliers and household consumers. As one ministry official observed:


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The adequate representation of interests was not seen as a relevant problem in the beginning of the negotiations. More than the new entrants the small consumers were regarded as being underrepresented. The ministry tried to support the German Consumer Association (AGV) … Concerning the representation of interests of new entrants the Ministry initially regarded them as being represented by the BDI … The Ministry reacted very passively when new entrants raised their claims concerning the issue of adequate access to the networks … it was the obligation and duty of the new entrants to organise themselves in some of the associations that were already participating in the process – i.e. like the VIK. (Interview BMWi, March 2001)

The passive role of the BMWi was further highlighted by the comment that the ministry tried to keep out when conflicts occurred between the associations and they asked the ministry for help. This was a surprising admission, if we consider that the aim of liberalisation of the market was to encourage competition not just between existing firms but also by expanding the number of firms. Thus, not surprisingly, incumbents, because of their early success in setting the rules of contact and contract, seen TPA and the AA as ‘quick and flexible and regulators as too reactive, information demanding and slow’ (interview energy company, March 2000). However, new entrants in both the gas and electricity sectors have had to take a dual regulatory strategy establishing access to the AA via the creation and participation in associations while calling in the press and lobbying government for ex ante regulation and a formal regulatory agency. Recognising the importance of association in the regulatory process in Germany, large and small new entrants have set about creating new associations and business lobbying alliances to facilitate access to new rounds of the AA. The most visible new grouping has been the Riva, ARES and Carbat initiative that created the Free Energy Supply Association (FEDV) with the aim of improved access to the AA and pooling informational and financial resources for representation at the cartel office and courts. Significantly, the FEDV has sought alliances with established associations like the VKU and the VDEW to improve its voice in the AA negotiations, but it has found divergence in goals as ‘both of them are trying to conserve the market, and we are working against it’ (interview new entrant, January 2001). A more ad hoc alliance is represented by the three small new energy distributors, Yellow, Best Energy and LichtBlick, which have started a ‘procompetition’ initiative to lobby for real competition in the sector.7 Instead of a third association agreement, they call for clear rules for net access to be defined and a sector-specific regulatory institution with responsibilities for price regulation and sanctioning. Nonetheless, for all the new alliances and associations, small new entrants continue to complain that negotiated Third Party Access (nTPA) allows the

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large regional generators to tie them into loss-making long-term contracts and that there is ongoing price discrimination. Therefore, real access to the market requires a strong local partner to gain fair access to the network. For example, in October 2000, the British firm Eastern Energy withdrew from bidding for a German regional utility after its German partner dropped out. In the courts, the BKartA can, in line with the essential facilities doctrine, open up access to new entrants and ban anti-competitive behaviour. The process is therefore highly juridical and its role is to apply and interpret legal norms rather than consider the public interest (Eyre and Lodge 2000; Sturm 1996). Consequently, the BKartA, owing to limited resources, was less investigative and proactive than UK authorities, and its procedures required that firms and interests initiated cases. However, the number of cases and technical information required to assess energy issues casts doubts over its continued ability to exercise speedy judgements. As one new entrant observed: We do not really think that a regulator is a 100 per cent right thing. But compared to telecom, where we had one monopolist, who is now controlled by around 200 people in the RegTP, which really focus on competition questions. In contrast, the electricity sector has 900 network operators. How should five to eight people in the Cartel Office do that … ? They do not have a real chance to control the market.8

Faced with this asymmetric balance of power between regulatory authorities and business, the government in 2001 created an energy task force of ten legal experts to prepare test cases for the cartel office. This was followed in 2004 with the new draft energy law which suggested the creation of an energy regulator/chamber in the RegTP with some 70 specialist regulators. The object of this new regulator will be to monitor abuse of market powers, but the actual ‘teeth’ of the authority have still to be decided. Associations have also played an important part in the representation of the German energy sector in Europe. The VDEW, the VIK and the BDI have all attended the Florence forums and taken a more proactive role than other national associations in the absence of an NRA to voice industry concerns. At a direct access level large German incumbents have established a European affairs function but all seem happy to work closely with their national associations and are encouraged to do so by the Commission. However, the major problem for German business representation is its continuing use of nTPA when the remainder of Europe has regulated Third Party Access (rTPA). In addition, the Commission wishes to establish a formal network of NRAs to facilitate EU best practice, non-discriminatory behaviour and improved transparency. As a result, while new entrants potentially have the ear of the Commission, owing to limited resources and the need to fight more pressing domestic access cases, few have mobilised at the EU level to lobby


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for agencies or representation at the ECJ and competition directorate (interviews energy company, January 2000). Managing implementation Because of the access and monitoring problems noted above, there has been much dissatisfaction with the AA agreements and nTPA prices negotiated between the regional monopolies and the new distributors. In electricity the main criticisms of the new access agreement have been that prices for access to the net are too high, that not all grid owners have openly published their grid prices, and that it involves high switching costs and an excessively long processing period (Bearbeitungszeit). This creates barriers to entry for new entrants and restricts their ability to gain new customers. Significantly many of the electricity AA problems are mirrored in the July 2000 gas AA. One new entrant observed in the press that the AA has hindered liberalisation as new entrants have been faced with a variety of tariff systems, an unclear basis on how to define prices – for example, diameter or distance of the used pipelines. Moreover, usage of the net often involves a variety of grid owners, but no standard treaty has been defined, hence individually negotiated contracts have to be negotiated and this can take up to seven months. Because of understaffing, the slow process of the courts-based appeal system, the uncertainty of judgements at end of the process and the prohibitively high costs of going to court, new entrants have been calling for rTPA and a sector agency. The FEDV has become a very vocal actor, lobbying for the creation of a sector regulator, and has initiated a number of high-profile court cases to highlight the discriminatory pricing strategies of the grid network monopolies. Riva Energie estimated that the potential cost reduction was as high as 30 per cent and has hired consultants to conduct a number of international yardstick exercises (interview energy company, January 2001). High-profile court cases (see Bauer, Chapter 3 in this volume) coupled with increasing consumer demands for more choice and lower prices placed the government under pressure to intervene and create a formal regulatory agency. However, while the primary drive for a regulatory agency has come from new entrants, some larger incumbents have recognised that the Federal Cartel Office is having difficulties dealing with the scale of the regulatory tasks required for the smooth running of the new energy markets. As Energie Baden-Wurttemberg (EnBW) observed, ‘the Federal Cartel Offices does not have the personal capacity, to cope with all the complaints without delay’. Moreover, large integrated companies like E.ON are discovering conflicting interests between their net operation divisions such as RWE, that are content with the nTPA, and their distribution subsidiaries like Yellow, that are faced with negotiated access contracts which are longer than the customer contracts. At the regional monopoly level, the number of contracts required between

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different network operators, for example, small network operators like the Stadtwerke, have limited the opportunities to start distribution outside their own networks and, as a result, they have lost customers or been forced into mergers. As a result of these barriers and the bargain between unequal partners, it has been estimated that energy costs are two to five times as expensive as those of other European states.9 In the short run, the BDI, the VDEW and consumer groups called for an increase in staffing and expertise in the BKartA, but in the long run, in line with the Commission, they sought to establish a regulatory agency. In response, the BKartA, once happy to allow the technical expertise of the market to establish rules of access, balancing codes and metering, has recognised the limits of self-regulation as well as the fact that that new entrants and consumers need greater protection. As one official noted: Ex ante regulation is much better. We see it in the merger cases. Here we say simply to the company that we are not going to give the permission. So they have to react. In ex post regulation you have to prove that they are charging prices that are too high. (Interview energy company, January 2001)

Faced with judging prices the BKartA has attempted to develop regulation based on national yardsticks, for example, in a recent case involving Edis, an East German local distributor, the BKartA compared costs with firms in Niedersachsen. However, the Cartel Office is faced with information deficits and no rights to audit firms not already under investigation. Consequently, it has had to resort to international yardstick comparisons, with all the assorted problems that this entails (Baldwin and Cave 1999). For example, in the case brought by Riva against RWE, the Cartel Office had to assess the market price against international prices in Sweden, Norway and Finland before proceeding to a full inquiry. Such specialised studies were time-consuming and required more than the five employees monitoring electricity and gas amongst others. As a result, technical studies are often left to consultants and the cost of the study paid for by the parties involved. For example, a recent case involving ENRON, Stadtwerke Tubingen and Heidelberg accused Ruhrgas of overcharging; the BKartA commissioned a consultant from any firm to conduct the study and billed the participants. However, while the threat of proceedings can act as a deterrent and force some firms to reduce their costs, the reality is that the number of cases the BKartA faced has increased dramatically every year since liberalisation, and there was a call from within the BKartA to have more personnel and greater regulatory powers. As a result, in August 2001 the BKartA with the BMWi established a new decision chamber with ten energy specialists assigned to


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develop tests for competition cases. In addition, the BKartA would like an improved staffing level if, some more regulation could be on price regulation. We have some new methods, which we think we can use for index method … another thing I would prefer is to change the burden of proof. Who has to prove that the tariffs are suitable? – at the moment we have to prove it. (Interview BKartA, August 2001)

In sum, voluntary self-regulation with its over-reliance on administrative courts and limited BMWi powers is under great strain both from new entrants, who require quick regulatory judgements and representation on the new voluntary association agreement negotiations, and the BKartA, who seeks more specialised staff and regulatory competencies. Whether the co-operative (corporatist) business agreement can survive this increasingly visible dissatisfaction, is ultimately a political decision. At the same time the BMWi is holding the threat of regulatory intervention over the heads of competing parties. As one German incumbent noted: ‘If the minister feels that the association agreement does not really solve the problem, he will sit down and create a network access regulatory system with tariffs, conditions and terms. There is a sword hanging over us’ (interview energy company, April 2000).

CONCLUSIONS Viewed as an ongoing process, the liberalisation of telecommunications and energy markets has not as yet created a uniformed European regulatory model. Hence, firms that increasingly operate across borders as incumbents or new entrants must learn to adapt to national variations and be aware of the opportunities that these differences provide. However, it is also apparent that businesses, operating within specific national institutional constraints, have a strong influence upon the nature of the firm–regulator relationship and thus directly and indirectly on how national and EU regulatory institutions interact and evolve. With increased competition and the opening up of national markets a high degree of rationalisation, merger activity and alliances have occurred in both the telecommunications and energy sectors. In the increasingly concentrated marketplace there are potential opportunities for the abuse of monopoly power, and thus a need for regulation and competition law. However, while common market questions abound, the NRAs have taken the lead on detailed implementation of community regulation, which has been accompanied by considerable national specific regulation. Consequently, the primary focus of business regulatory activity has been at the national level, while recognising that there are risks of double jeopardy for those firms operating in a number

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of regulatory jurisdictions. To overcome these problems the Commission has sought to co-ordinate national regulatory responses via the creation of networks of national regulators. In this context all firms, large and small, have welcomed the creation of the new regulatory forums, with the hope that EU regulatory ‘norms’ and best practice will evolve and permeate national regimes. However, business in line with their NRAs is averse to the idea of an additional regulatory tier or European regulatory agency. In terms of EU access and lobbying, incumbents would appear to have a comparative advantage, with their Brussels-based government affairs offices, but in reality the EU institutions have looked favourably towards new entrants’ positions, especially when presented in aggregate form via new issue specific associations and alliances. In comparative terms, new entrants’ preferences across sectors and countries are uniform in their desire for strong ex ante regulation that facilitates equal access to the networks and monitors potential discriminatory pricing. Moreover, this desire for proactive regulation has manifested itself in a desire for strong and independent regulatory agencies in both sectors and countries. Incumbents, conversely, have favoured the growth of EU competition law and the trend towards ex post regulation. However, while the general trend would appear to be towards the creation of sector-specific agency solutions, the exact nature and functioning of agencies and interaction with other regulatory institutions is framed by distinct and robust business and bureaucratic traditions in member states. As the German case illustrates, firms of all sizes appear to be comfortable with the strong rule of law, the dominance of anti-trust law and the Cartel Office, as well as the favoured role given to associations in regulatory negotiations. However, new entrants from third countries have found the high level of litigation and overlapping competencies of regulatory institutions hard to manage, closed, risky and expensive. In contrast, the UK model was perceived as open to all firms regardless of origins or size, but it does require that firms learn a style of conciliatory lobbying behaviour, which can act as a hidden access barrier to firms from abroad. Yet, for all the inertia in the initial stages of telecommunications and energy regulation, new entrants in Germany have lobbied government hard for, respectively, strengthening and creating independent sector regulators with ex ante and ex post competencies. In the German case this has meant that new businesses have occasionally come into conflict with the existing regulatory competencies of the Federal Cartel Offices and the BMWi. Moreover, where clashes have occurred, the new entrants have turned to the courts as a means of signalling market failures and creating regulatory/institutional precedence. Thus we could argue that in the younger and multi-institutional German regulatory regimes where norms and relationships are still to be defined


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business has actually take a proactive role in attempting to frame the institutional debate. The British model has also evolved over time and in the light of high-profile clashes between regulator and firms but, unlike Germany it has also benefited from a clear regulatory hierarchy and price review cycle that makes contact an iterative ‘trust-based’ game. Nevertheless, while we see more conflict in the present German regulatory model than in its British counterpart, we could envisage that the relationship between regulated and regulatee will stabilise as firms recognise that conflicts and courts do on always win the long-run battles.

NOTES 1. 2. 3. 4.

5. 6. 7. 8. 9.

We were aware that business attitudes to institutions vary with size and market status and therefore the interviewees sampled included incumbents and new start-ups. Business recognises that regulation imposes costs and will try to mislead the regulator as to the potential costs of production, efficiency gains and changes in technology (Parker 2004). ‘Fair deal for consumer: modernising the framework for Utility Regulation’. Interestingly this was a common complaint in the early days of regulation in the UK. As firms had to establish a working relationship and a regulatory capacity to supply the information requested. It often took a couple of price reviews or an MMC referral for the firms to dedicate sufficient resources to managing the regulatory relationship (Coen and Willman 1998). The age and limited strategic role of the RegTP also accounted for why the respondents thought it unlikely that the RegTP would be active in fostering and supporting German firms’ positions in Brussels. However, large incumbents like BG Transco in the gas sector have some 60 or more people, owing to the high regulatory accounting demands placed upon them as part of regulated access contracts. This significant call for a regulator and competition is particularly not worthy as Yellow is a subsidiary of EnBW and Best Energy is a main shareholder of BEWAG, two of the largest vertically integrated producers (see http://www.pro-wettbewerb.de). These individuals were mainly concerned with M&A (mergers and acquisitions) control in electricity and had to monitor, gas water and banking in addition to gas and electricity. See http://pro-wettbewerb.de.

5. Managing regulatory developments in rail: compliance and access regulation in Germany and the UK Adrienne Héritier INTRODUCTION In the last decade the industrial landscape and regulatory structures of the network industries such as telecommunications, energy and rail transport, have undergone a considerable transformation. Liberalisation has restructured the former natural monopoly sectors; new players with new preferences, such as new market entrants, have emerged. New regulatory institutions have been created to regulate the market at the national and the European levels to foster competition, and at the same time to compensate for the negative consequences of market integration in order to protect general interest services. This changed regulatory environment raises many important research questions such as: how do the new regulatory structures function? What is their impact on market creation and service provision (Héritier and Schmidt 2000)? In this chapter I focus on one specific aspect which has not yet been much analysed: how do firms in the rail sector interact with the newly created regulatory bodies at the national and European levels? And how do regulatory authorities deal with their new tasks vis-à-vis firms? I examine the interaction between the regulator and regulatee from two different systematic perspectives: first, by focusing on the attempts by firms and industrial associations to gain access to and influence regulation, that is their attempts to influence the regulators’ setting of rules for business at the national and the European levels, and secondly, by examining regulation that monitors behaviour and attempts to resolve disputes that arise in implementing the existing regulation at the national and European levels in the day-to-day interaction between firms and regulators. Empirically the analysis focuses on the British and German rail sectors. In investigating regulator–regulatee interaction, I employ a principal–agent approach of delegation which can be applied to any relationship where the performance of a task, specified in a contract, has been delegated by one actor 120

Managing regulatory developments in rail

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(principal) to another actor (agent) and where the principal, as a residual risk bearer, maintains a right to control the agent, that is, the agent making most of the important organisational decisions (Moe 1984: 753). The theory relies on three behavioral postulates: (a) actors are rational utility maximisers, (b) principals and agents may develop different preferences and (c) there is an informational asymmetry between principal and agent. Principals delegate tasks to agents because they do not have the necessary resources (time and expertise) to deal with individual, detailed decisions on a daily basis, and because they want to make a credible commitment which outlasts their own mandate. Because principals cannot specify all the agents activities in the delegation contract nor fully control them, they allow agents some discretion in pursuing their activities (Epstein and O’Halloran 1999). Thereby, principals can reduce their costs of implementing and enforcing regulatory authority. However, because the agents have more expertise on the regulatory issues and information on the daily specifics of contract operation than the principal (informational asymmetry), they can pursue their objective of increased autonomy (Lupia and McCubbins 1994; Majone 1996b; Pollack 1997). Owing to information asymmetry, the agent may develop preferences that are diverging from those of the principal and may engage in ‘shirking’ or ‘slippage’.1 Both cause agency ‘slack’ (Moe 1984; Pollack 1997). Therefore, the challenging task for the principals consists in the controlling of the agents who have more information than the principals. In the control of agents, the principal needs to keep the right balance between the requirements of delegation and the prevention of the abuse of the delegated powers. For this purpose, principals engage in two different strategies: control may be applied ex ante or ex post. Ex ante control is typically exerted during the initial delegation of regulatory authority to the agent. It defines the scope of the agent’s activity, the legal instruments available to the agent and the procedures to be followed by it. Such a choice comes, however, at a cost. It makes agents less flexible and comprehensive in their activities (McCubbins et al. 1987). Ex post control, or oversight procedures come in two varieties: monitoring and sanctioning. Monitoring allows principals to reduce the information asymmetries enjoyed by the agent. Typical monitoring consists of ‘police patrols’ (standing oversight committees) and ‘fire alarms’ (constituent complaint and judicial review) (McCubbins and Schwartz 1984). Sanctioning provides a broad variety of measures, such as budget cuts or increases, appointments, overriding of agency behaviour through new legislation and the revision of the agency’s mandate (Huzar 1942; Moe 1984). Through both strategies, principals expect to reduce agency drift that accompanies agent shirking and slippage. Principals apply these instruments when the (perceived) costs of agents’ shirking exceed the costs of devising and applying the instruments of control. Agents, for their part, seek to avoid intervention

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because it decreases their decision-making certainty and autonomy. The expansion of ex ante regulatory autonomy requires legislation and therefore the approval of political principals. It is more cumbersome. For this reason, agents prefer to expand discretionary authority which is less costly. As a result, principals, in turn, will strengthen intervention by using their control instruments. The principal–agent dynamic can provide useful insights into our analysis of the interaction between regulatory authorities and firms in the rail sector. In this case, we are dealing with a multi-level regulatory relationship between different principals and agents. The interaction extends from the European, to the national level to the firm level and vice versa. We have three different principals, the European authorities (P1), the national governments (P2) and the national regulators (P3). And we have three agents, the national governments (A1) are the Commission’s agents;2 the national regulators (A2) are the agents of the national governments; the firms are the agents (A3) of the national regulators. Two actors, the national governments and the national regulators, wear two hats, they are principals and agents. It is the interaction between national governments (P2) and national regulators (A2 and P3), but mainly between national regulators (P3 and A2) and firms (A3) which are of interest in the context of our empirical research. However, the behaviour of the national regulator (P3) vis-à-vis firms is also influenced by the relationship between the national regulator to its own principal, the national government (P2). And this may, to some extent, be influenced by the latter’s to its principal, the European Commission (P1). The interaction is viewed from two angles, access and implementation from the regulators’ and regulatees’ perspectives: the first focuses on agents (A3) seeking access to regulators (P3 and P1) in order to have influence on regulatory practice. The agent has an interest in gaining access in order to have influence on the principal’s regulatory decisions; the principal on his or her part is dependent on expert information from the agents and therefore welcomes an input of information. The second perspective focuses on the implementation of the contract, that is, the attempt of regulators (P3) and their principals (P2 and P1) to avoid agency drift on the part of firms.3 Under the access perspective, principal–agent theory is linked with interorganisational resource dependence theory which views interaction between organisations as a process of mutual exchange (as developed by Aldrich and Pfeffer 1976; Pfeffer 1982; and recently formulated as a theory of access by Bouwen 2001) in order to account for the greater or lesser easiness of access of a firm. Since organisations do not dispose of all resources necessary to fulfil the task assigned to them, they must enter into transactions and exchange resources with other organisations. The most important resource available to firms wishing to access and possibly influence the decisions of a regulatory


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authority are information, expertise, and experience in production and market processes. The higher the expertise which can be offered, the more frequent and the easier is the access to be gained by the regulator. In order to increase their possibilities for access and influence, firms organise themselves into associations.4 In contrast to individual firms, associations can also offer to secure the regulatory compliance of their member firms (Verpflichtungsfähigkeit, or governability: Streeck and Schmitter 1985). An agent’s access to the principal is also shaped by the specific nature of the regulatory ‘target structure’. The specific institutional arrangement of the regulatory structures, including courts, addressed by firms and industrial associations (Lehmbruch 1987), I argue, is an important factor in determining the access strategies used by firms. But, what if there are several principals with different preferences (Aghion and Tirole 1997; Moe 1984; Spiller 1990)? If there are multiple layers of authority, or even several authorities at one level that can be approached, this opens up new action strategies for firms and associations: if the attempt to gain easy access fails with one authority, it may succeed with another. Put differently: if various authorities are responsible for regulating, be it at the horizontal or vertical level, the relative power of the individual authority is expected to be smaller than if there is just one authority. In brief, by linking principal–agent theory with inter-organisational resource exchange theory to account for companies’ behaviour in seeking to gain access to a regulator and to account for the latter’s willingness to grant easy access, and – further – by applying this theory to a given regulatory institutional set-up (single, double or multiple authorities at the horizontal and vertical levels) and a specific sectoral structure (single, limited or multiple players in the deregulated sector), I come to the following propositions on access: ●

●

H1: firms commanding large market shares/large firms are likely to have a higher degree of access than small firms. H2: associations of firms are more likely to gain access to regulatory authorities than individual firms.

And with respect to the regulatory structure I submit that: ●

H3: a regulatory target structure with multiple access points (multiple regulatory authorities) and overlapping responsibilities offers a firm/an association greater strategic possibilities for attaining and retaining high access than a target structure with only one access point.

Turning to the second perspective focusing on implementation, principal– agent theory, as elaborated above, claims that, given informational

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asymmetry, the principal, that is, regulator, is uncertain about the agent’s behaviour. The agent disposes of detailed information on the market’s functioning, the network infrastructure’s production technology, the provision of services and client relations. Since regulation imposes costs on the firm, the latter will use this informational asymmetry in order to reduce these costs. The regulator, in turn, will try to control it, ‘to keep him on target’ (Moe 1990: 225), as defined in the regulatory contract. For this purpose, he or she will monitor the maintenance of the contract with different instruments of control and sanctioning. This is done in a number of ways: information may be gained of affected groups (such as customers organisations) and be used to compare agents’ performance, by creating monitoring systems and by employing systems of ‘fire alarm’ (McCubbins and Schwartz 1984). If contract performance is found unsatisfactory and/or new political principals define new regulatory goals, the regulator may redefine the contract.5 The agents, often with long-term investments in the network infrastructure, prefer a stable contract with terms which are not subject to change and which reduces the risk of ‘administrative and political expropriation’ (Veljanovski 1993). If there is continuing uncertainty about what can be expected, ‘then it becomes impossible for business to plan with confidence’ (Veljanovski 1993: 359). Hence, it is plausible that firms prefer an independent regulator which may be expected to guarantee ‘credibility’ and a more stable contract than a regulator who is subject to strong political guidance. Once again, I claim, that the structure of the regulatory institutional arrangements plays a role in fulfilling the contractual relationship between the principal and the agent. Faced with several regulators (Prosser 1999), an agent may try to play them off against each other. If dissatisfied with the interaction with one regulatory body, he or she can turn to another in order to solve a conflict. Secondly, the principal’s position vis-à-vis the agent is influenced by the nature of the regulated sector. The regulator’s strategies to control the agent will vary, depending on whether implementation needs to be controlled in a monopolistic, duopolistic sector as opposed to a sector with a multiplicity of market players. The degree of dependence on information from one actor decreases when other market players’ behaviour can be used to compare performance (‘yardstick competition’). From these theoretical considerations we can derive the following propositions: ●

H1: if there is agency shirking, that is, the performance of the agent is unsatisfactory in the eyes of the principal, the latter will – if this is


●

●

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unilaterally possible – establish devices to gain more information by creating monitoring and ‘watchdog’ mechanisms and, in case of continuing non-compliance, apply sanctions. H2: if the level of performance of the regulatee is judged unsatisfactory, the regulator seeks to change the terms of contract. H3: a change in political guidance may cause a change to the terms of contract between regulator and regulatee.

With respect to the regulatory structure I propose that ●

●

H4: a regulatory structure with multiple authorities on the vertical and horizontal level offers the regulatee more strategic possibilities for reducing regulatory costs. H5: a market structure with multiple players facilitates regulatory monitoring because it offers additional information and the possibility of comparing the performance of various agents.

METHODOLOGY In trying to explain under which conditions firms successfully access regulators (question 1) and how regulators seek to ensure compliance with the regulatory contracts (question 2), I first use the size/type of a firm, and the existence and type of association as explanatory variables (independent variables) and then the type of regulatory structure and sectoral market structure. The dependent variables to be accounted for are ‘degree of access’ under the first question, and modes of securing compliance with the regulatory contract under the second question. The variables are operationalized as follows: in the first step (access H1–H3), where access is investigated, I first look at the firm-oriented variable with the values of size and type. Company ‘size’ is characterised as small/medium and large in reference to the relevant product and geographic market; ‘type’ is distinguished as incumbent and market entrant. Since incumbents are always large market players, size and type are collapsed. The number of firms compared here are n = 4 (in 6 interviews). The independent variable used in the second step (access H4–H5) is the institutional structure of the sectoral regulatory authorities. Here I distinguish empirically between a sectoral multiple or single-authority structure at the horizontal level and vertical level, and a single- or multiple-authority structure across sectors. On the dependent variable, degree of access is empirically measured at a formal and an informal level. The formal dimension is constituted by the

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existence or non-existence of official consultation procedures conducted by regulators and of fora for exchanging information at the European and national levels, instituted by the regulatory authorities; at the informal level the empirical dimension is the contact established with regulators, for example, on the basis of personal communication (telephone calls, emails, meetings) outside of a formal organised context. Investigating interactions at the level of implementation/contract compliance (the second question), the same two explanatory variables as indicated under question 1, are used, plus an additional variable, sectoral structure. Assuming the existence of non-compliance on the part of the agents, the dependent variables are the control and sanction instruments applied by the regulators, and the redefining of the regulatory contract. The number of cases analysed are the two countries (UK and Germany) with their regulatory structures. The comparison is based on a litteral replication (Yin 1994) across the two cases: the regulatory structure is multiple in both countries; the sectoral structure at the network level is that of a monopoly. Therefore we expect to find similar outcomes in the values of the dependent variable. Only at the level of service operation is there a sectoral difference between the two countries, namely, competition in Britain in the franchise tendering process, while in Germany the former state monopolist clearly dominates service operation. Hence we have a variation in the independent variable across the two countries, that is, a logical replication of the two cases (Yin 1994), and would expect to find different outcome values on the dependent variable. The data have been collected on the basis of the analysis of official documents and, most importantly, on the basis of intensive, structured interviews. Twenty-nine interviews have been conducted with regulatory authorities, members of government, associations, and firms of different types in the two countries. The assessment of the hypotheses in the light of the empirical data is an attempt to probe the plausibility of the hypotheses. It does not constitute a test of the hypotheses. To what extent are the claims regarding access and implementation supported by the empirical data?

THE CASE OF THE UNITED KINGDOM Access to the Regulators6 Focusing on access first, the empirical findings show that the most relevant level of regulation is still considered to be the national level, not the European level. At the national level ‘a lot is on the plate’ (interview rail forum [RF],


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November 1999) to be re-regulated and, therefore, informal access is sought by service operators and the network company.7 Formal access to the national regulator and the Strategic Rail Authority (SRA) is guaranteed, too, through extensive consultation processes in which the network company and the train operators take part. The size of a firm does not seem to play a role in facilitating access. The regulators seem to be interested in an intensive exchange of information with both types of regulatees (H1). An important example is the consultation on the format of track access agreements. These consultation procedures may impose quite a workload on firms (interview TOC, January 2000). As one operator remarked ‘I had actually engaged solicitors to prepare a response to the regulatory document; i.e. the regulator’s proposal to use the model clauses for the next generation of track access agreements … there is so much at the moment’ (interview TOC, January 2000). European authorities8 can be accessed both formally and informally. There are formal consultation processes involving all sectoral actors. There is some confirmation of the proposition (H1 and H2) that incumbents and large firms with a dominant market position have the highest degree of access to the Commission. Thus, the former private network monopolist, RT, now Network Rail, with a permanent office in Brussels, had established good working links with the Commission and regularly comments on legislative drafts (interview RT, November 1999). Access is facilitated by forming associations (H3), but it is not facilitated to the same degree for all types of firms. Because the rail sector, has been drastically transformed in the course of liberalisation, the associative structure also underwent restructuring. The formerly integrated industry has been fragmented, therefore, both a new preference structure and new cleavages have emerged, which – among other things – pit network owners against service operators. The associative structure only in part reflects these new interest structures. Our findings indicate that large players have more successful access to European regulators through associations than do small players. Thus, the network infrastructure managers have been active in creating their own new associative structures that reflect the changes in the preferences of the sectoral actors. They have founded the European rail infrastructure managers’ association to represent their interests (interview RT, November 1999). By contrast, the smaller firms, like those of the train operators, whose subsector (service operation) has been divided up into 25 companies, are much less active in taking such steps.9 They are still represented by the old European railway associations. These ‘old’ associations, however, such as the Community of European Railways (CER) and the Union Internationale des Chemins de Fer (UIC), which were founded by the formerly integrated

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railways, do not reflect the fact that network managers and service operators, to some extent, have conflicting interests. Indeed, CER seeks to accommodate the interests of both parties. This makes it difficult to actively influence European legislative proposals. Thus, in 1988, when the Commission was drafting the directive on access charging and capacity allocation, a UIC working group tried to come up with proposals, but failed to do so because of conflicting interests. By contrast, the network operator did some work on it and presented a detailed critique of the draft; as a consequence he could safely say, ‘There are things in that draft which reflect our views’ (interview RT, November 1999). A contrasting view was presented by one TOC when it emphasised that the network operator, with its office in Brussels, is ‘keeping an eye out for the interests of the wider UK rail industry’ (interview TOC, November 2000). More recently, the service operators, too, are increasingly working through the Association of Train Operating Companies (ATOC) at the European level. In the interplay between firms with multiple regulatory authorities situated at different levels (H4), there is some evidence that a multi-level authority structure indeed widens the strategic possibilities of individual national actors. One empirical indication for this is that the various public and private actors from the rail sector do not speak with one voice when they address European bodies; instead, they pursue their individual strategies. Railtrack even stated that it would address the Commission directly in order to oppose the regulatory goals of the ORR at the national level because it considers the Commission’s regulatory goals to be closer to its own. As an industry we have a very individual relationship with Europe. There is no sense of common purpose [of the industry]. There is a lot of confrontational behaviour and misalignment of incentives. It does not make us work hand in hand with our regulators to get the best deals in Brussels. (Interview RT, November 1999)

It even emphasised that it would hesitate to pass on information about its communication with the Commission to the British regulatory authorities (interview RT, November 1999). These attempts of private national sectoral actors to bypass their national regulators by collaborating with Brussels (H4) could be pre-empted by coordinating activities between the national and European regulatory authorities. The findings suggest that this sometimes occurs. The ORR basically has two links with European bodies: a direct link to the Commission, to which it offers its expert views on regulation, and a political route through the Department of Transport, which it uses to influence Council decisions (interview ORR, November 1999). Additionally, one can observe attempts at horizontal co-ordination between different national regulators by means of a new


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observatory body, the European Rail Observation System (EROS), chaired by the Commission. Another body, the Regulatory Bodies Working Group which was set up under the auspices of the Developing European Railways Committee (DERC), is also chaired by the Commission (ORR 2004).10 It functions as a forum for the exchange of information on how the infrastructure package is applied and how the traffic on railways is developing. It is chaired by the Commission. While functioning as a forum at present, it might gradually turn into a policy-making body making recommendations to the Commission (interview ORR, November 1999).11 Managing Implementation Turning to contract compliance and the mode in which regulators deal with it, the overall finding is that there has, indeed, been considerable dissatisfaction with the performance of Railtrack and the TOCs. The regulatory bodies think that there has been non-compliance and a poor quality of infrastructure and service performance (see the documentation in Héritier and Schmidt 2000). One point of criticism was that RT had lost the overview over the available capacity it had left on the network when negotiating contracts with train operators. Railtrack arguably sold more pathways to more operators than the capacity would allow for, because each additional operator would bring an extra track access charge. Only in 2002 did RT compile an asset base containing details of their assets (interview ORR, December 2002). ‘RT is working on finding out what its assets are’ (interview SRA, December 2002). It seems that it also had lost control over its subcontractors because it did not audit them properly (interview TOC, December 2002). Then when the accidents happened and the share price went down, they could not raise the capital to finish the major projects, such as the West Coast line. The transformation of RT into Network Rail and the earlier than planned renegotiation of franchises with the TOCs are substantial evidence to the fact that performance was not considered satisfactory. Non-compliance, it as been argued, is facilitated by informational asymmetry and the ensuing agency loss which the regulator seeks to compensate for by applying various control measures. The data show that to prevent non-compliance, steps are taken in both directions: to compensate for informational asymmetry, the regulator seeks to improve his information; simultaneously, instruments are redesigned to improve compliance and to generally make the regulatory regime more consistent in terms of aligning the incentives of the involved actors. Various measures are taken up in order to compensate for informational asymmetry (H1). The regulator (P3) seeks modes to gain additional information about the regulatees’ (A3) behaviour. From the very beginning a

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benchmarking system has been established which defines individual benchmarks for the 25 service operators whose performance is subsequently publicised and ranked (Héritier and Schmidt 2000). Another strategy of the regulatory authorities is to develop internal expert structures in order to cope with monitoring tasks. The findings show that there are some initiatives of that sort. The SRA took more technical experts on board: ‘We are recruiting people who are experts in operating technical engineering and signalling so that they can make informed assessments and offer advice on the credibility of the statements of the underlying performance’ (interview SRA, January 2000). It is striking that SRA staff has grown in the last years from about 100 to 500 people (interview SRA December 2002). However, a counter-view from the same authority doubts that it is possible to build up all the necessary counterexpertise; that, rather, the right incentives should be set and that it should be left to RT and TOC managers to make the right decisions (interview SRA, May 2000). The firms, for their part, view the monitoring efforts critically, as attempts ‘to get inside the organisation’ (interview RF, January 2000). They complain that the regulator progressively ‘sucks in more information, but in an illtargeted and scatter-gun approach’ (interview RT, November 1999) and that there is ‘a law of increasing regulatory intrusiveness’ at work, implying that regulators tend to ask more and more questions, even that regulation tends to take the form of ‘micro-management’ in companies (interview RF, November 1999). For small companies which often do not have their own regulatory director, it is difficult to deal with all the information queries. Thus a rather large TOC has two persons who spend about 25 per cent of their time dealing with the regulatory authorities (interview TOC, January 2000). Another interview partner deplores the imbalance between the regulator’s and the regulatee’s personnel: ‘The relationship between one smaller company and the regulator is that in the firm there are three people answering the telephone, while [by contrast] 30 people are asking questions at the rail regulator’s’ (interview RF, January 2000). In response to this ‘regulatory intrusiveness’, regulatees work with a strategy of counter-information, supplying ‘large packages of information’ to the regulator. ‘That’s motivated out of selfinterest at a moment where he [the regulator] feels entitled to ring us and ask “Can I have this, can I have that?”’ (interview RF, November 1999). One TOC admits that it is fully understandable that monitoring is intensive because a lot of public subsidies are involved (interview TOC, January 2000). Another measure to compensate for informational asymmetry and control the agent’s (A3) behaviour ex post is ‘firebell ringing’ (Moe 1984). As expected (H1) it has become a quite prevalent mode for the regulator (P3) to invite affected third parties to provide information about the regulatees’ market behaviour. Since liberalisation there has been a lot of public attention


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directed towards the privatised railway and its performance. ‘If you have 20 to 30 million customers, like in rail and energy and water, there is no way of keeping out of politics’ (interview RF, January 2000). The empirical evidence shows that, paradoxically, privatisation has made the system more transparent and has increased public attention. Precisely because the railways are private, yet simultaneously receive public funds, the public is critical when shareholders make profits and the service performance is poor. Moreover, because of the fragmentation of the service-operating sector in question, responsibilities can be allocated more easily; this provides for an additional accountability-enhancing factor (interview ORR, November 1999). ‘Pretty much everything is transparent … if something goes wrong … you usually know who’s to blame’ (interview ORR, December 2002). However, it has also been pointed out that, thanks to the Passenger Charter under which performance statements were made available, there was transparency prior to privatisation. I do not think that there is more officially published data. There is relatively little officially published financial data … What has changed is that as a result of privatisation there is a lot more … quite good ‘second-guessing data’. (Interview TOC, November 2000)

‘Because there is a lot of demand for data, all investment houses in the city now have their transport departments which “create” and “invent” data that is [then made] publicly available. And because they are so clever and good at it, they get quite close’ (interview TOC, November 2000). It was argued that a change in political guidance (H3), that is, the political principals preferences (P1 and P2), may affect the regulator’s control over contract compliance of the agent (A3). Our findings confirm that. After the Labour government came into office, the regulator and the franchise director were to some degree forced to more strictly check implementation. Labour appointed a new rail regulator12 calling for tougher regulation of the rail industry (interview RT, November 1999). As a consequence, the regulatory style has arguably changed from being consensual and confidential to being confrontational, keen on publicising the behaviour of companies and ‘aggressive’ in seeking more and more information (interviews RT, November 1999; RF, January 2000). It is also keen on using the available sanctioning instruments more proactively. Thus, the new regulator under Labour sent two draft enforcement orders to RT, whereas the previous regulators had not sent them any (interview RT, November 1999). The abolishing of the Office of Passenger Rail Franchises and its transformation into the Strategic Rail Authority and the strong political leadership exerted vis-à-vis the SRA shows that it is a conduit of political guidance into the sector. In particular, after the transformation of RT into Network Rail in 2002, the SRA has become ‘an agency of government’ (interview ORR, December 2002), taking on the role

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of an investment project manager, and developer of capacity utilisation strategies, under close political leadership in overall transport policy. As compared to the beginning ‘we are much more under a government type of hat … much more linked to the government’ (interview SRA, December 2002). ‘We could be seen … as the expert arm of the government on rail policy. We are expected to lead, to fund, to manage the franchises, monitor, but we are an arm of government … That has changed’ (interview SRA, December 2002). In contrast, since July 2004 the Office of Rail Regulation, as the independent economic regulator, has been much less likely to be subject to government guidance.13 But between 1999 and 2004 the jurisdiction of the Rail Regulator has repeatedly been questioned by the government: under the Byers Bill of October 2001 which intended to put the ORR under direct political control, but was withdrawn upon pressure from industry and the financial markets stressing the importance of independent economic regulation; under the government’s review of rail regulation from October 2001 to June 2002 which led to the introduction of a board model, instead of the existing singleperson regulator model and, finally, it was under scrutiny again in the run-up to the Railways and Transport Safety Act of 2003 (Winsor 2004: 5–6). In a far-reaching reform the government White Paper of 2004 proposes a reorganisation of the regulatory structure. While respecting the independence of the Office of Regulation it establishes a single strategic decision-maker, that is, the Department of Transport, and proposes to abolish the SRA. The DoT is to take over its functions, the definition of the strategy and the outputs for the railways and the decision of how much public funding they are to receive as well as the franchising functions. The government’s objectives are set out in the Public Service Agreement in the White Paper. Thus, there will be only a single regulator, the ORR, dealing with economic regulation, safety,14 performance (and consumer protection) and cost. The ORR will ensure that the government sets outputs which realistically can be delivered for the funding available (interview ORR, November 2004). Network Rail will have the overall responsibility for delivering improved performance and will thus oversee the performance of private train companies. A new contract will be put in place between Network Rail and the government to run alongside the franchise contracts with train companies. One important reason for the proposed reform is that the government would like to have more direct control of the public expenditure on railways. Until now, the ORR in carrying out the reviews of access charges has had to determine both Network Rail’s outputs for the operation of the rail network, its maintenance and renewal, and the price that should be paid for them.15 The government then had to deal with the financial consequences for the other parts of the rail budget (White Paper 2004: 2–10). In the future the government will decide the level of public funding for the railways in consultation with ORR (White Paper 2004: 2–10).


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In the transition period until new legislation is put into place, all strategic decisions of the SRA must seek the DoT’s approval before undertaking work. In the management of franchises the SRA must keep the Secretary of State for Transport informed and notify him or her before making or revoking any franchises (White Paper 2004: 1–12).16 There is considerable evidence for the claim that dissatisfaction with the agents’ (A3) performance will lead to a reformulation of the terms of the contract (H2). Additionally, the empirical findings point to a factor of noncompliance which has not been anticipated on general grounds, namely, inconsistent incentives in the contractual regime. With respect to the TOCs, the contract was redefined, that is, the renegotiation of licences was anticipated. Thus it is pointed out that the early franchise agreements with the TOCs were too loosely written and needed tightening (interview RT, November 1999). Step by step all franchises are being renegotiated in a competitive process. Six to nine bids have been put in for each of the franchises, including the old franchisees. Most recently the bidding process has been simplified and shortened.17 In a pre-qualification round the bidders submit short proposals, and, when short-listed, submit long and detailed bids (interview SRA, December 2002). Whereas in the first franchising round the bidder who asked for the lowest subsidy and/or offered to run extra trains18 got the deal, the new bidding process is conducted in such a way as to encourage investment and to strongly stress performance. Well-specified targets with key performance indicators (plus an obligation continuously to explore higher and better service levels – interview SRA, May 2000) are set out in the contracts. After first considering an extension of franchises for up to 20 years, the duration of franchises has later been shortened again (interview RF, January 2000). However, a franchise can be extended if the performance goals are met (interview TOC, January 2002). In response to the increased performance demands, TOCs, among other things, put into use metro-trains, that is, highcapacity suburban rail cars, which allow for a higher load factor standard (interview TOC, December 2002). The SRA control practices underwent changes, as well. Thus, it switched from registering all the minutes of delay to imposing greater penalties the longer the delay is (interview TOC, December 2002). The contract with the network operator was changed in 2002 when, after the financial collapse of RT, the latter came into administration and was then transformed into a private sector company, Network Rail. The new company, under the new licence, can make a profit, but the latter flows back into the company for investment (interview ORR, December 2002). The whole aspect of project management and financing of infrastructure investment has been taken out of RT’s hands. After recognising that the private sector alone will not provide the necessary

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investment into major projects, the train operators and the network operator shifted the blame for non-investing back and forth (interviews RT, November 1999; ORR, December 2002), the SRA has taken a leading role in managing investment projects with public money together with TOCs and Network Rail. The TOCs are asked to specify which infrastructure it needed to increase the capacity of the network so that it can deal with increasing passenger transport (interview TOC, November 2000). Network Rail is to focus on maintaining, renewing, managing their contractors and subcontractors (interview SRA, December 2002) and taking overall responsibility for the performance of the sector (White Paper 2004). Contracting-out of maintenance work has been abolished and maintenance in the future will be conducted in-house (White Paper 2004; Wright 2003). In order to eliminate inconsistent incentives of the actors involved, a new type of track access contract was established in 2003, simplifying and streamlining the rules governing the parts of TOCs and Network Rail and aligning incentives. It clearly specifies what each part has to contribute to the enterprise and introduces a system of remedial action when things go wrong (interview ORR, November 2004).19 There is some evidence, but also some counter-evidence regarding the claim that a multi-authority structure makes monitoring of firms’ (A3) compliance more difficult (H4). Owing to an overlap between the ORR’s and the SRA’s monitoring functions (interview ORR, November 1999), there seems to have been some confusion regarding competences. Thus in consumer protection: some consumer issues are dealt with in franchise agreements. Some are dealt with through licences issued by the regulator. Some are dealt with by both. The public does not know which person they should write to. When they want to complain about fares, they need to write to the Franchising Director. If they want to complain about passenger information, they need to write to the ORR. (Interview ORR, November 1999)

To remedy this problem, the revised legislation of 2000 put all consumer protection into the hands of the SRA (interview ORR, December 2002). Another area of split responsibility is safety: the safety regulator, the Health and Safety Executive (HSE) ‘is concerned with the overall picture’ (interview ORR, December 2002), and an organisation called Railway Safety develops the national standards for safety. In case of an accident, the HSE does not act on its own; instead, it relies on RT, now Network Rail to act, and it will ask the regulator to take licensing action if necessary (interview ORR, November 1999). Recently an independent Rail Industry Safety Body has been established to demonstrate safety leadership in the industry and develop safety standards (interview ORR, December 2002). Finally, the White Paper 2004 transfers the responsibility for safety to ORR.


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There is no evidence that, in order to avoid compliance (H4), the ORR and the SRA have been played off against each other (interviews RF, January 2000; TOC, November 2000; SRA, December 2002). In part this is due to the well-functioning co-ordination of ‘cases’ between the different responsible bodies. There are many informal contacts between the ORR and the SRA at all levels and on a regular basis (interview ORR, December 2002). Moreover, in 2002 the SRA and the Rail Regulator signed a concordat to make clear that there is no ‘regulatory competition’ and no regulatory overlap between the two organisations. The concordat describes the roles and responsibilities of the two bodies and seeks to ensure that the incentive systems for train operators and infrastructure providers are aligned (Concordat 2002). From the firms’ viewpoint, having access to several regulatory authorities does not increase their influence vis-à-vis the individual regulator, but rather leads to increased regulatory burdens. ‘What slightly worries me is that with two regulatory bodies, they will generate twice or three times as much work’ (interview RF, November 1999). It was finally argued that a market structure with multiple players facilitates regulatory monitoring, whereas a sectoral structure with one player renders it more difficult (H5). The empirical evidence corroborates this claim. The sectoral structure is seen to lack balance and to favour RT/Network Rail to the disadvantage of the 25 train operators. Network Rail, as a monopolist, is not pressed by competition. This imbalance has arguably led to network-access contracts that are unfavourable to the TOCs. By negotiating 25 to 30 contracts, RT has gained a lot of experience, whereas a TOC (in the same time period) negotiated just one contract. In order to compensate for that weakness, the ORR passes information to the TOCs that includes expertise on how to negotiate contracts (interviews ORR, January 2001; December 2002). As one TOC said: If we didn’t have the ORR, our negotiating powers with RT would be almost nonexistent … They are so large, so monopolistic, that without a regulator to say, ‘No, we will change your licence conditions’, we would not get any movement. Many of the small ones … were just brushed aside. (Interview TOC, November 2000)

As a response to the imbalanced sectoral structure, there are now attempts during the licence renegotiations to reduce the number of market players, particularly to reduce the number of small ones (interviews TOC, January 2000; November 2000; ORR, November 2004). Conversely, there is some evidence confirming that a multiple player sector – which exists in service operation – facilitates the control of contract compliance. With many players (24 TOCs), ‘yardsticking’ can be used by the regulator to gain considerable information on performance. The SRA does collect comparative data. ‘A year ago we divided them [the

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service operators] up by classes on the basis of performance. That generated quite a bit of correspondence with the train operators, particularly the ones who found themselves at the bottom edge of the scale’ (interview SRA, May 2000).

THE CASE OF GERMANY Access to Regulatory Process As in the UK the most relevant level of access for the rail industry lies with national authorities, that is, with the Federal Cartel Office (BKartA) and the Federal Rail Authority (Eisenbahnbundesamt, EBA).20 This is where the important decisions in interpreting the sectoral legislation are made. It does not seem to be problematic for any of the market actors – that is, for either the incumbent or the small market actors – to gain informal access to these two authorities. For sectoral players, the European level of access does not play as prominent a role as the national level. However, for the small railway undertakings and new market entrants, informal meetings, which serve to exchange views and information on market behaviour and technological innovation, are regularly organised by the Commission (interview train operator, September 2000). The claim that access is facilitated through associations (H2) is not confirmed for reasons which in part are similar to those in the UK. What emerges is that the role of associations in guaranteeing access and influence has been subject to change for three reasons: first, liberalisation and the new opportunities associated with it have brought about diverging interests among the various regional operators. While some operators have used the new opportunities to develop new transport business activities, to acquire new costumers and to enlarge their own networks, others have remained closely attached to DBAG. With interests having thus become much more diverse, the consensus in the association has dwindled. Second, the Association of German Transport Industry used to include all German public transport enterprises and railways except the DBB (Deutsche Bundesbahn); now the formally privatised DBAG has joined the association. Hence, the latter has to represent the interests of this large incumbent, too. Thirdly, the association’s activities have been weakened because DBAG seeks to settle all the relevant issues of co-operation in bilateral negotiations with the regional railways (interview train operator, September 2000). Owing to these factors, the association does not seem to play an important role in enhancing access and in expanding influence on regulatory decision-making.


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Managing Implementation In the German railway sector, compliance is expected with respect to the regulation of market access. In other words, discrimination in network access and in market operations in general is to be prevented. Unlike the UK where market-correcting regulation plays an important role alongside marketcreating regulation, in Germany market-creating regulation is at the centre of the regulatory agenda. In 2004, however, a new ten-year infrastructure service and finance accord has been established between the government and DBAG. This accord – to be renewed on a yearly basis – sets the financial contribution of the government for the infrastructure network as well as the scope and quality of the infrastructure to be guaranteed by DBAG. The latter will submit a yearly report on the compliance with the quality indicators (Die Bahn 21 September 2004). Performance as measured by the objective of market creation is mixed. Competition has increased as a whole: At present about 150–160 railway companies – other than DBAG – offer services on the railway network (interview train operator, September 2000). However, DBAG has by far the largest market share in network and service operations. Thus, DBAG, with DB Network, DB Regio and DB Freight, is in a very strong position: in longdistance passenger services it has a de facto monopoly. In regional passenger transport and freight transport it is the largest player. Given the overpowering position of DBAG, it is not surprising that there are many complaints – which have been brought to the fore by ‘firebell ringing’ – from new market entrants and other small competitors, who accuse the former state monopoly of trying to impede market access and of discriminating against them in the market. Many instances and modes of discrimination have been pointed out: ●

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DBAG has a de facto monopoly in maintenance operations – that is, it is too costly for new market entrants to run their own maintenance shops. This means that market competitors of DBAG need a contract with DBAG for maintenance work. These contracts often entail lengthy negotiations, and sometimes no agreement is found at all. DBAG argues that it lacks maintenance capacity, even for its own rolling stock (interview BKartA, September 2000). In another case, where DB Regio, a subsidiary of DBAG, lost the tendering process for running trains on a line, DBAG now refuses properly to maintain the tracks. It argues that it lacks the funds and has to give priority to its own lines. Instead of repairing the tracks, they ask the new operator to run its trains at low speeds (30 km) across bridges. ‘Now is this an abuse of a market position by DBAG?’ (interview

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●

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●

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BKartA, September 2000)? It is even suspected that by not maintaining the line, it aims to make it less and less attractive, so that it carries less and less traffic and finally can be closed down (interview EBA, August 2000). The prices charged to non-DBAG train operators for market access have also been discriminatory. DBAG Network is free to charge the prices it deems fit for access to the network. There have been many complaints, particularly in regional passenger transport, because prices charged to DB Regio (belonging to DBAG) were up to 40 per cent lower than the prices charged to other market players. The reason for this is that DB Regio was given a discount for long-distance transport, which – by definition – can only be offered by a large player such as DB Regio (interview BKartA, September 2000). The BKartA considered this to be discriminatory behaviour on the part of the DBAG and an abuse of market power. Another train operator complained that under national freight transport legislation, freight leadership lies exclusively with DB Cargo.21 In international freight transport, instead of this, there is a joint freight contract for all shippers participating in a system of single wagon transport. As a consequence, under the German system those freight transport operators with no direct contact to the customer see themselves as in danger of being eliminated from the market because they are losing all knowledge of the changing market conditions (interview train operator, September 2000). Another element of discrimination consists in the fact that DBAG has leased all freight infrastructure, such as shunting stations and shunting tracks, to DB Cargo. ‘Each time another market participant – and this is frequently – does not just need the line, but an additional track, to reposition a train, you have to go to DB Cargo … that is, to your competitor, in order to rent the necessary additional infrastructure … It just may so happen that there is none available or that it is very expensive’ (interview train operator, September 2000). A further point of conflict has been station access prices, which have varied greatly. Some regional railway operators have argued that they are discriminated against by DBAG (Network) because the prices at some stations are 800 per cent higher than in other stations. DBAG has argued that the high charges are due to a high number of employed staff (interview EBA, August 2000).

In sum, as the BKartA points out: ‘There are endless possibilities for the DBAG to discriminate against new market entrants, and these are very hard for the cartel office to pinpoint’ (interview BKartA, September 2000).


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The above-described multiple possibilities for market discrimination by DBAG and the frequent subtlety of these possibilities indicate a considerable degree of informational asymmetry between the regulator and the regulatee in favour of the regulatee(s), that is, DBAG. In other words, it is difficult to substantiate the lack of compliance. Where non-compliance can be substantiated, the BKartA first seeks to stop the abuse without a formal ordinance (interview BKartA, September 2000). Many individual cases are solved informally ‘with two telephone calls or a letter, rather than through formal complaint and investigation procedures’ (interview BKartA, September 2000). In the two-tier price structure case (in addition to a relatively low price per train kilometre, every network user had to pay a relatively high basic fee to use the rail network – see above) the BKartA threatened to prohibit such a behaviour which led to the replacing of the two-tier by a one-tier linear price structure (Böge 2004: 6). Formal BKartA procedures are very lengthy because courts have to confirm them. Until corroborated by a court, they do not come into effect, except in the special cases, in which there is ‘immediate application’. This, again, has to be confirmed by a court (Bundeskartellamt 2004; interview BKartA, September 2000). Informality is also convenient because of the lack of personnel at the BKartA. At present there is just one person responsible for rail transport, and this is not even his exclusive function. In particularly busy times, two more staff members can be temporarily recruited from other divisions (interview BKartA, September 2000). In view of this lack of personnel, it would be difficult for the BKartA to conduct simultaneously several ‘large’ procedures (interview BKartA, September 2000). The EBA is a much larger, although less powerful, organisation than the BKartA. With its 1200 staff (mostly consisting of former DBB employees), it defines its role as an authority for supervising technical matters and discrimination to market access. It does not see itself as a regulatory authority. It initially had very limited responsibilities: its own initiatives were restricted as were its rights of scrutiny and its sanctioning power. As one official put it: ‘We are a toothless tiger’ (interview EBA, August 2000). The number of complaints addressed to the EBA has increased since it was established. Many complaints are made informally, communicated by telephone. Most decisions are made informally before the official decision is taken. ‘The network operator often offers a compromise solution and the (formal) complaints are withdrawn; the DBAG makes extraordinary offers to its competitors. That’s how many conflicts are dealt with’ (interview EBA, August 2000). Since being instituted, the EBA has sought to expand and consolidate its powers. To do so, in some instances it has proceeded very strictly. The station price case provides one example. In that instance the EBA demanded a lot of

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specific information from the DBAG concerning pricing. ‘We did it on purpose to clarify whether they are obligated to give us information’ (interview EBA, August 2000). The latter refused to do so and instead only offered data giving a general overview. In another case, where a competitor accused the DBAG of not properly maintaining one of the regional lines that DB Regio had lost in a public tendering process, the EBA required detailed information from the DBAG, too. This time the DBAG denied the EBA’s right to information altogether. The EBA took the case to court and obtained a ruling in its favour (interview BKartA, September 2000). In yet another instance, the EBA prohibited the DBAG from charging rival train operators higher prices for network-related information and services and prohibited a large infrastructure operator from taking into account its own construction plans when granting access to tracks. To make the EBA more powerful, its competences have been extended. The legislator, among other reasons has extended the powers of EBA for ex post market abuse control by means of technical discrimination. As shown above, there have been numerous complaints about discrimination to network access on technical grounds. If the EBA sees a case of discrimination, it can now intervene without having to wait for a complaint to be filed by an operator. Additionally, it has been given more effective sanctioning instruments, such as the possibility of imposing fines up to €500000; further, it has also been given access to documents and the regulatees’ premises (interview BMVBW, August 2000). ‘This was important because there is little formal whistle blowing when there is market discrimination by the DBAG. [This is] because the new market entrants still have and want to cooperate with the DBAG’ (interview EBA, August 2000). Now complainants can remain anonymous, and the EBA can engage in supervising activities on its own (interview EBA, August 2000), for instance, to prevent the company from gradually preparing to close down a line. From the regulatees’ viewpoint, the relationship with the EBA is judged differently. The DBAG views the relationship with the EBA as a good working relationship. The EBA’s process of licensing new locomotives is considered to be relatively speedy (interview DBAG, September 2000). Other train operators, however, criticise the double role of the EBA as an authority supervising market discrimination, on the one hand, and a body licensing rolling stock, on the other. They think a conflict of interest is involved. They consider the EBA to be too strict in the admission of locomotives (interview train operator, September 2000). Further, since the EBA administers its own budget on admission fees, it has – in the view of one operator – incentives to make licensing processes long and costly (interview train operator, September 2000). In the case of the German railways, no government influence (H3) can be


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identified as determining the severity of compliance control. The BKartA is a truly independent body. The EBA as such is much more susceptible to political influence. So far, however, it has not seen itself as having been subject to governmental influence (interview EBA, August 2000). On the contrary, the DBAG’s attempts to convince political decision-makers to reduce the EBA’s competences have been to no avail (interview EBA, August 2000). Rather, the EBA’s powers have been extended. It has been argued that multiple regulatory authorities enhance the regulatees’ possibilities for avoiding compliance (H4), because various bodies can be addressed and may be played against each other. The empirical evidence does not bear out this claim, given the close co-ordination of activities between the two authorities. With one sectoral regulatory authority, the EBA, and one cross-sectoral regulatory authority, the BKartA, there is a double structure. While the division of labour between the EBA and the BKartA is basically clear, it is still being fine-tuned. The EBA deals with technical questions, such as individual access contracts and the licensing of rolling stock, the BKartA is responsible for competition and general questions, such as the price system question (interviews BKartA, September 2000; BMVBW, August 2000). In contrast to the EBA, the BKartA can only prohibit certain activities. It cannot prescribe positive activities (Act against Restraints of Competition 1957/2001). It can only intervene if discrimination is above a specified threshold of importance and if competition in general is at risk. And, as mentioned, in the past the EBA could not take action on its own initiative. This initially left a gap regarding managerial and technical questions, which were neither covered by the BKartA nor the EBA. However, with the amended legislation and widened powers of the EBA, the EBA has been empowered to take action on individual questions, which the BkartA is not allowed to deal with (interview EBA, August 2000). When complaints addressed to the EBA imply technical questions, they are handed on to the BKartA. Similarly, all generally relevant information is passed on to BKartA, too (interview BKartA, September 2000). ‘So far the co-ordination has functioned well at an informal level’ (interview EBA, August 2000). In sum, the empirical evidence indicates that the dual structure of the regulatory authority in Germany (the BKartA and the EBA) does not invite actors to mutually play off authorities – mainly because the co-ordination between the two authorities functions well on an informal basis. The DBAG views this somewhat differently. It criticises that the division of labour is not as clear-cut as it should be, and that their market competitors may engage in ‘regulatory shopping’, that is, that they can first turn to one authority and then – if they do not like the outcome – turn to the other (interview DBAG, September 2000). As we have seen, the incumbent has also questioned the decision-making competences of the EBA on grounds of principle.

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It was claimed that a multiple sectoral structure with many market players makes compliance control easier (H5). The evidence confirms that – in spite of the overpowering position of the DBAG – the existence of multiple actors at the margins of the market facilitates control of compliance. It also makes it easier for the BKartA and the EBA to carry out their supervisory functions. As illustrated above with many instances, the non-DB market players are very active in ‘ringing the firebell’ and drawing the attention of the BKartA and the EBA to any DBAG discrimination. Thus, numerous competitors of the DBAG have complained that discrimination in network access exists in technical areas, that is, technical details for the provision of access (Böge 2004: 7).

CONCLUSION Comparing the two countries from the perspective of access, the empirical data indicate that in both countries the national level is still the most important level of interaction between regulator and regulatees, although the European level has clearly gained in importance. In Britain the formal modes of access, such as consultation organised by regulatory authorities, play a more important role than in Germany. Informal access seems to be equally important in both countries. Our first hypothesis (H1) that large firms enjoy easier access to national regulators is not consistent with empirical information in either country. The national regulators seem intentionally to cultivate the relationships with smaller market actors in order to guarantee market access and to gain information about the behaviour of the incumbent. However, there is some evidence that the network companies are more strongly represented at the European level. Association-based access (H2) in both countries has been subject to change in the course of the liberalisation of the sectors. New preferences have emerged, cleavages have changed. The resulting heterogeneity of interests within the old railway associations has weakened their possibilities of having influence. As regards implementation, it is striking that the substance of compliance control differs in the two countries. In Britain both market-creating regulation and market-correcting regulation is fixed in the contracts and controlled by the regulatory authorities. In Germany, the authorities only supervise nondiscrimination of market access and technical aspects of licensing, but not service performance (at least, not until very recently). In both countries there is a considerable degree of non-compliance. In view of this non-compliance, regulators seek to increase information about non-compliance and apply sanctions. They endeavour to extend their competences and to improve the instruments of intervention (H1), often under the pressure of political guidance, that is, of new government with new preferences (H2). The


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expectation that a multiple regulatory structure facilitates non-compliance by allowing for regulatory shopping (H3) is not confirmed. There is evidence, however, that a sectoral structure with multiple market players makes the regulators’ control of regulatees easier (H4). This holds, even if there is a dominant player, because the existence of a few small players in the market allows the regulator to gain more information.

NOTES 1. 2. 3. 4. 5. 6. 7. 8.

9.

10.

11. 12. 13. 14. 15.

The latter occurs when the initial delegation provides incentives for the agents to pursue activities contrary to the goals of the principals (Moe 1984). In the implementation of European regulation. If principals can agree and organise. Organising in associations also implies costs. Thus, associative objectives will have to be defined such as to please all members, that is, on the lowest common denominator. Although they possibly may themselves have developed preferences diverging from the contract. For the description of the regulatory structure of both British and German rail sectors I refer to Dominik Böllhoff’s Chapter 2 in this volume. This is primarily due to the fact that European rail legislation is more of a framework nature than a detailed regulation, the latter occurring at the national level. The UK is in line with the European railway package directives. It has framework agreements and access agreements. It also has a system of charging, the separation of services and infrastructure operation, and a system of licensing. What is new is that the infrastructure manager has to analyse congested capacity and has to produce a capacity enhancement plan. This requirement fits well with the SRA’s capacity utilisation strategy and investment strategy. For ORR the package directive means that people can appeal to it on a wider range of issues than before and, rather than having one regulator, a board will be instituted (interview ORR, December 2002). They arguably have little interest in the European integration programme and, as staff of the former British Railways, still have the mind-set of the former vertically integrated railways (interview RT, November 1999). For them, the management by contract, introduced with liberalisation, was a ‘totally alien idea’ (interview SRA, January 2000). While this is welcomed by the UK (‘otherwise we would have endless discussion in EROS on issues’, interview ORR, January 2000), France, by contrast would prefer more memberstate control. The DERC considers practical issues associated with the implementation of the ‘first infrastructure package’ consisting of three European directives: Directive 2001/12/EC covering the separation of essential functions between infrastructure managers and train operators, Directive 2001/13/EC which sets a common format for licences for European train operators and Directive 2001/14/EC covering issues of capacity allocation and charging and the establishment of an independent regulatory body. Or it may turn into a proper regulatory body (interview ORR, November 1999). Who had been active in developing Labour’s rail programme. From 2002 onwards all regulators were expected to follow the recommendations of the Better Regulation Task Force Report of the Cabinet. According to the White Paper, ORR should take over safety protection from the Health and Safety Executive (White Paper 2004; interview ORR, November 2004). The ORR criticised that in assessing access charges, the SRA did not give the full picture of their budget, and it was therefore difficult for the ORR correctly to factor it into the access charges review (interview ORR, November 2004). The ORR carried out interim reviews of the network access charges agreed between the former RT and the TOCs (interview ORR, December 2002). The 2002–03 access charges review brought a new charging regime in

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16. 17. 18. 19.

20. 21.

Business–regulator relationships April 2004. The review came to the conclusion that £24.4 billion would have to be invested in the network until 2009. The chairman of the SRA, Richard Bowker, stepped down in protest at the reorganisation that he qualified as a ‘quasi-renationalisation’ (Clark 2004). From previously a negotiation time of up to two years. Which, given the reduced network capacity, led to delays and overcrowding. ‘One problem with the contractual regime is that once train operators have their franchises, they know what they are going to pay to RT. They know that we have a large expenditure programme. They argue that they are already paying us for everything we do on maintenance and repair. The end result is that the operators are not spending enough either. Our interest is not to spend more than we have to. The operator’s interest is to extract as much as they possibly can. There are conflicting economic incentives’ (interview RT, November 1999). The BKartA occupies a much more central role in Germany than the Office of Fair Trading (OFT) does in the UK. Given the concurrent powers of the OFT and the ORR, the OFT cannot have a say on railway matters, unless the ORR explicitly agrees. The DBAG also is the only one who has the necessary know-how and the logistics to put together an entire system of single-wagon transport (interview train operator, September 2000).

PART III

Implementation and Refining Policy

6. The politics for a sustainable energy industry: renewable energy policy in the United Kingdom and in Germany André Suck INTRODUCTION The national energy industries, comprising the gas and electricity markets, are currently facing two challenges which require that they and their governments provide new policy solutions. One challenge is to introduce more competitive market structures into the respective sectors against the background of an internal energy market (IEM) in Europe (Cameron 2002; Glachant 2003; Matláry 1997; Pollitt 1999). The other challenge concerns the increasing relevance of sustainability strategies, which is especially due to the growing seriousness of the problem of global warming. Related to this, one pivotal strategy to combat global warming has been to increase the use of renewable energy technologies (RETs) in electricity generation (Baentsch 1997; Eyre 1998; Groscurth and Weinreich 1998). Renewable energy technologies comprise generation installations that use non-fossil resources, which are unendingly available (for example, solar energy, geothermal energy, biomass, wind and hydro) and do not cause climate-damaging greenhouse gas emissions such as carbon dioxide (CO2); they therefore represent sustainable forms of energy generation. Despite the fact that, since the early 1990s, both the United Kingdom and Germany have had public policies supportive of bringing RETs onto the market, the increased energy capacity generated from renewable resources in the two countries reveals striking differences. In Germany, since 1990 it has been possible to increase the share of energy generation from renewable sources significantly, by 40 per cent (Staiß 2000). In the electricity market, it has been possible to increase the share of renewable sources of the total electricity supplied from 6.7 per cent in 2000 to nearly 8 per cent in 2003 (BMU 2004). For example, there has been a tremendous increase in the number of wind power plants constructed. Their generation capacity recently exceeded a threshold of 15000 MW. Moreover, the portion of biomass in 147

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electricity generation was able to be quintupled (from 2000 GWh to 10000 GWh), and electricity generation from smaller hydroelectric power stations was able to be increased by 1000 GWh (Staiß 2000). Despite comparable natural preconditions for using renewable energy sources in energy generation,1 the United Kingdom has not been as successful in increasing the capacity of RETs. The installed generation capacity of wind power plants amounted only to 772 MW at mid-year 2004. In electricity generation, landfill gas remained the most important renewable resource in England with a realised output of 2.5 GWh opposed to only 0.3 GWh from wind. In spite of ambitious targets for expanding the use of renewable energy generation to 15.4 per cent by 2015/16, the annual rate of realising respective installations only increases marginally. Whereas in 2002 a wind energy capacity of 87 MW could be connected to the national grid of the whole UK (including Scotland), this figure increased to 103 MW in 2003. At the end of 1999, renewable energy sources accounted for only 2.8 per cent of the total electricity generated (DTI 2000a). Between 1998 and 2003, the share of renewable sources in electricity supplied grew only marginally from 2.2 to 2.6 per cent (DTI 2004). In total, from the time the policy to bring RETs onto the market was broadened, in 1990, until the end of 1999, less than 1000 MW of new generation capacity was installed (Mitchell 2000). Considering that in comparative policy studies of neo-institutional provenience, federal states are perceived as being less capable of initiating innovative reform policies than are unitary states, the different policy outcomes give rise to some challenging questions. The better problem-solving capacity of unitary states is also attributed to a lower number of veto players, which enables their governments to more efficiently and directly issue public policies aimed at solving the problems at hand. In light of this, the concentration of executive power in a one-party government, the predominance of government vis-à-vis the Parliament, the existence of a two-party system, together with the majority vote system, are regarded as being supportive of the political problem-solving capacity. In opposition to that, the territorial division of power in federal states is often described as an institutional barrier to reform-policies of the executive (Scharpf 1988; Tsebelis 2002). Tendentiously, the larger number of relevant political actors influencing the policy development in a federal system increases the susceptibility to watered-down policies. This may even result in decision blockades, and hence it can lower the innovation capability of federal states if compared with unitary states. As part of the concurrent legislation between the federal and the state levels in the German political system, the larger innovation capability of the German energy policy is therefore in need of explanation. In the light of the high political priority of extending energy generation from renewable resources in the UK since New Labour took over government in 1997 (DETR 2000b; PIU

The politics for a sustainable energy industry

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2002), this chapter also analyses the restrictions and future opportunities, within the unitary, but increasingly devolved, state of the United Kingdom, to cope with this technological challenge. Whereas existing political research has already found great heterogeneity in the national regulatory regimes of the energy industry (Coen and Héritier 2000; Eberlein 2000; Eising 2000a; Schneider 1999a), here I focus on describing and explaining the development of different regulatory approaches that aim to support renewable energy sources. For this purpose, the following research basically refers to a combination of two explanatory factors that have influenced policy development for renewable energy generation. The first concerns the institutional structure of the respective political-administrative system (that is, the unitary state in the United Kingdom versus the federal state in Germany) and respective modes of sectoral governance. In this context, this comparative policy analysis contributes to the debate about the effect of different state structures on policy-making and implementation (Benz 2001; Wachendorfer-Schmidt 2000). The other explanatory factor for the differing innovation capability relates to the role of different policy paradigms that dominated the energy policy in both countries when the policies for renewable energies were being made. Analytically, paradigms consist of beliefs, values and techniques shared by members of any community, for example, a scientific community or, as in this chapter, a community defined by the actors dominating the sectoral policy (Bernstein 1976). The ‘overarching set of ideas’ entailed within the paradigm ‘specify how the problems facing [decision-makers] are to be perceived, which goals must be attained through policy and what sorts of techniques can be used to reach those goals’ (Hall 1992). Related to this, the following research is also to analyse the interdependent, but ambiguous logics between market creation and market correction policies. According to a statement by Prosser that ‘across utility regulation it has proved impossible to separate economic approaches to regulation from the broader political and social framework’ (Prosser 1999, p. 198), the following analysis will scrutinise the impact of different policy paradigms (market versus sustainability paradigm), which decisively influenced the development of the renewable energy policy in the respective country. The comparative policy analysis is divided into two parts. On the assumption that the policy development for launching renewables was clearly influenced by their realised marketing potential, this chapter starts with an analysis of the different policy contexts for renewables in the United Kingdom (early liberalisation and privatisation of the electricity market) and in Germany (monopolistic electricity market) from 1985 until 1997. Accordingly, it examines the impacts of domestic technology policies on the development of the initial policies aimed at bringing RETs onto the respective market. In a further step, I then examine the implementation of these policies

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during the 1990s. Since both countries followed different approaches (quota versus price regulations), this study contributes to the current debate on the effectiveness of different regulatory policies to spreading renewable energy generation in liberalised electricity markets (Espey 2001; Vrolijk 2002). The second part covers recent market reforms and their impact on the respective renewable energy policy. It describes the policy development and implementation of a new approach in the UK, that is, the introduction of a quota-based certificate system for renewables, known as the Renewables Obligation (RO). With regard to Germany, the analysis will illustrate the impacts of the liberalisation of the electricity market in 1998 on the further development of the price-based approach.

THE COMMENCEMENT OF A RENEWABLE ENERGY POLICY IN THE UNITED KINGDOM: 1985–97 When the United Kingdom began expanding its renewable energy policy in the late 1980s and early 1990s, its energy policy was concerned with the most extensive privatisation and liberalisation enterprise that had ever been undertaken in British history, that is, that of the national electricity supply industry (in relation to telecommunications and rail). Accordingly, the transition from a formerly nationalised and monopolistic industry to a privatised and competitive one was clearly dominated by the pivotal challenge to secure the supply of electricity (‘to keep the lights on’), and to do so at reasonable costs. Considering this political background, I examine the sectoral governance of the electricity utilities in the United Kingdom from the mid1980s to the early 1990s, before this industry underwent a fundamental transition from a monopolistic industry to a privatised one in 1989. The patterns of co-ordination between the unitary UK government and the industry had a decisive impact on the outcomes of the technology policy of RET. Their outcome is thought to be crucial to the perceived feasibility of both marketing such technologies as well as developing adequate policy instruments for supporting them in a liberalised electricity market. The Sectoral Governance of the Electricity Supply Industry in the United Kingdom and its Impact on Technology Policy for Renewable Energy Generation When the electricity industry in the United Kingdom was a nationalised and monopolistic sector, the role of the Central Electricity Generating Board (CEGB) in the national energy policy was dominant. The CEGB was responsible for the construction and operation of all the power stations and for


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the transmission of electricity via the national grid to 14 regional electricity companies (RECs), the latter then being responsible for the distribution to the final customers (Ledger and Sallis 1995). Facing a nationalised industry until the sectoral liberalisation in 1989, the British government approached the electricity industry with a very restrained style of intervention. Accordingly, governmental action overall ‘was characterised by limited control over and an absence of co-ordination between the individual corporations’ (Burgi 1985: 13), with the CEGB having ‘immense (effectively monopsony) power over its equipment suppliers, with its purchasing policy determining which technologies were developed and which companies survived’ (Thomas 1997: 43). These patterns of sectoral governance had a decisive impact on the research and development policy of energy technologies. After the oil price crisis in the early 1970s, which provided the impetus for enforcing energy research in alternative generation technologies in order to reduce dependence from fossil fuels, strategic decisions over research and development programmes were clearly dominated by the CEGB, which ‘dictated the pace of change in generating technology’ (Chesshire 1996). In general, the centralised governance structure of the British energy industry tended to give generous support to generation technologies with features resembling those of the sectoral structure, namely, centralised and large-scale generation technologies. For example, during the 1970s and 1980s fossil and nuclear plants were rapidly upscaled. In relation to this, the CEGB was frequently criticised for failing to commit sufficient resources to RETs. Moreover, even within the government’s renewable energy programme, different inconsistencies prevented it from committing to a more proactive approach. These inconsistencies concerned ‘large changes in government priorities for supporting the different types of renewables over the past twenty years which, although no doubt unavoidable to some extent, have reduced the continuity of the development effort’ (Mitchell 1996). Another problem was that investments were wrongly focused: the CEGB was mostly interested in developments capable of bulk energy generation such as large wind turbines and tidal power. ‘The major proportion of the total R&D expenditure was on technologies, which have, for all intents and purposes, been curtailed (wave and geothermal), or changed tracks, such as the wind programme’ (Mitchell 1996).2 The Policy Development of a First Wider Renewable Energy Policy in the United Kingdom: The Non-Fossil-Fuel Obligation The monetarist ideas of efficiency orientation and competition, which are meant to benefit the British economy and society (Hall 1992), represented the main paradigm behind the energy reforms in the late 1980s. These ideas had a

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deep impact on the development of the initial instrument used in marketing renewables. First, initiatives for expanding renewable energy generation started in 1988, when the British government presented early plans for the exploitation of renewable energy sources. These early plans were to be attained by extending the scope of the Non-Fossil-Fuel Obligation (NFFO) to the area of renewables. The legislative initiative to issue the NFFO related to the upcoming privatisation of the CEGB and the fact that nuclear power generation was not deemed competitive in a liberalised market. To ensure the competitiveness of nuclear power, the NFFO required the RECs to buy a certain amount of electricity generated from non-fossil fuel sources (MacKerron 1996). In other words, the NFFO guaranteed the purchase of electricity from nuclear and later from renewable sources at premium price conditions (Helm 2003). The NFFO subsidy scheme was funded by the Fossil Fuel Levy, which was financed by the electricity bills of final consumers. This support scheme allowed the firm that operated the nuclear power stations (that is, National Power and, later British Energy) to sign contracts at above pool prices and to receive a steady (and very substantial) flow of revenue.3 In this context, the easiest way to do something quick and straightforward (by bypassing the demands of a long legislative process) for RETs was to shift a share of the NFFO budget from nuclear power to the area of renewable energy sources (interview DTI, November 2001). Similarly to the nuclear obligation, the NFFO for renewables required that the RECs secure a specified capacity each year from renewable sources (Ross, C. 2000). Hence, the NFFO – later to become the pivotal policy instrument to support renewable energy sources – ‘developed out of the need to find a means of supporting nuclear power, once it was realized that the nuclear portion of the ESI could not be privatised in 1989’ (Mitchell 1996). Against this background, the unsteady and rather unsuccessful public research and development policies for renewables cast into doubt that respective technologies would be a practicable and competitively feasible alternative under the new competitive market conditions. According to the mechanisms of the NFFO, the regulation of renewables was based on the principle of quota regulation, which implied strong central government involvement in defining and implementing renewable energy projects. In 1990, government decided to commission 1000 MW of generation capacity from renewable resources until the year 2000. Shortly after this, the amount was increased to 1500 MW (roughly 3 per cent of electricity supply by 2000). Operators of renewable energy installations who wanted to participate in the programme had to bid for the tendered amounts of eligible capacity, first, by determining the quantity of energy that they would feed into the grid. Second, they had to define a price per kWh for the produced electricity. After this bidding procedure, the DTI (until 1992 the former DEn)


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ranked the operators according to offered prices and capacities. The highest price of the last bidder who was able to participate with his offer and replenish the tendered amount, determined the price for all other bidders. As a consequence of this system, only the cheapest bidders received an NFFO contract for the reimbursement of the difference between the premium price, which was defined in the bidding rounds, and the pool-selling price. Altogether there were five tendering procedures, generating a contracted energy capacity of about three GW until 2000 (see Table 6.1). The NFFO 1 and NFFO 2 contracts lasted until the end of 1998, while NFFO 3 to NFFO 5 contracts were for 15 years, following a maximum five-year development period (Mitchell 2000). The strong role of the central government is further indicated by its power to determine the capacities of different RETs (so-called technology bands) that were to be promoted. Therefore, the NFFO was called a ‘banded obligation’: it forced the UK government ‘to pick winners’, that is, to decide over the eligibility of single RETs. The Implementation of the Non-Fossil-Fuel Obligation After illustrating the policy development of the NFFO, the following section explains the implementation and respective policy outcomes for England and Wales, referring to the combination of my two explanatory factors (politicaladministrative system and prominence of sectoral policy paradigms). Table 6.1 contains data on the implementation of the NFFO rounds until 30 June 2001. Whereas the NFFO seems to have succeeded in bringing the prices for renewable energy generation down,4 in later rounds it increasingly failed to realise the respective projects as stipulated in the NFFO contracts. Therefore, the key weakness of the NFFO policy is that it led to an increasing gap between the contracted and commissioned capacity in the different NFFO rounds. Table 6.2 indicates the decreasing commissioning rates for contracted renewable energy projects. On the one hand, the reasons for the steadily worsening implementation of the NFFO policy can be found in characteristics of the political-administrative system. In this regard, the centralised features of the national planning system significantly restricted the attempts to construct decentralised RETs (especially wind power plants). Furthermore, the focus on competition strongly constrained the efforts to implement renewable energy projects (Cleirigh 2001). Related to the restrictions emerging from the centralised national planning system, the requirement for timely consent to planning, in accordance with the requirements laid down in the NFFO contracts, was predominantly a problem for the realisation of wind power plants.5 Especially, this technology band

Table 6.1

Status of Non-Fossil-Fuel Obligation (at 30 June 2001) Projects contracted

Projects generating

154

NFFO

Number

MW

Number

MW

1 2 3 4 5 Total

75 122 141 195 261 794

152.1 472.2 626.9 842.7 1177.0 3270.9

61 82 78 65 45 331

144.5 173.7 295.0 158.0 85.8 857.0

Source: Hartnell (2001); Mitchell (2000).

Projects terminated Number 14 40 — — — 54

Projects to be commissioned

MW

Number

MW

7.6 298.5 — — — 306.1

0 0 63 130 216 409

0 0 331.9 684.6 1091.3 2107.8

Completion (%)

81.3 67.2 55.3 33.3 17.2 51.5


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Table 6.2 Commissioned capacity of Non-Fossil-Fuel Obligation round (at 31 December 2000)

Commissioned (MW) Commissioned (%)

NFFO 1 (1990)

NFFO 2 (1991)

NFFO 3 (1994)

NFFO 4 (1997)

NFFO 5 (1998)

69

100

204

140

55

95

71

55

24

8

Source: Cleirigh (2001).

faced serious resistance from the national planning system. Reinforced by the existence of campaigns opposed to wind power plants (NIMBYsm – not in my backyard – of landscape organisations), national and local government have different motivations for awarding planning commissions. Accordingly, local planners and planning inspectors emphasise local environmental factors more than they emphasise national renewable energy targets (interviews BWEA (British Wind Energy Association), November 2001; NWP (National Wind Power (subsidiary of RWE Innogy)), March 2003). As a result of this lack of planning awareness at the regional and local level, which hampers the realisation of renewable energy projects, current reforms of the national planning system aim to delegate more regulatory responsibilities to these levels of government (DTLR 2002; Thomson 2001). Related to this, a recent report of the PIU stressed the necessity of giving renewable energy generation greater prominence in the regional and local planning system. Regional planning bodies should place ‘greater prominence on energy issues in regional planning guidance’ (PIU 2002: 152). In order to achieve this task, the DETR deployed ongoing devolution reforms to incorporate sustainability targets into a broader framework aimed at amending national planning policy. Accordingly, all Government Offices of the Regions (GoRs) in England and Wales were to carry out regional renewable energy studies in order to assess the potential for renewable energy developments within their respective region (Oxera Environmental 2002).6 The PIU report also recommended assigning a regulatory duty to regional development agencies (RDAs) to set regional targets for renewable energy production in the sustainable development frameworks for their regions. Furthermore, greater emphasis is to be placed on proactive planning for energy developments at a local level. As it will be elaborated later, the federal system of government in Germany was much more favourable for renewable energy interests since it, early on, provided the federal states and the local communities with legislative powers

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to adapt their respective planning systems to the new challenges of sustainable energy generation. In this regard, the rather centralised and unitary characteristics of the political-administrative system in the United Kingdom seems to have hindered local policies (especially building and planning laws) from adapting earlier to the requirements of decentralised and sustainable energy generation. Another serious hindrance, perhaps the most serious one, was the competitive design of this NFFO instrument, which did not result in a pricing mechanism that reflected the real costs of generating electricity from renewable sources. Accordingly, the bidding system is charged with having caused strategic bidding behaviour by the renewable energy developers: it is supposed that their bids were below real electricity production costs. From an individual perspective, such strategic bidding behaviour must be assessed as purely rational. Owing to the fact that the contract was for a future project (since NFFO 3 the generation facilities were planned to begin operating five years after the conclusion of the NFFO contract) and expected further technological development would likely cut costs, developers calculated the generation costs of the respective technology on a decreasing basis. Furthermore, developers generally seemed to have underestimated production costs when putting together their bids, especially financing and planning approval costs. Since there were no substantial penalties for not commissioning projects, developers did not take account of their contract duties when production costs did not fall to the required level (Cleirigh 2001). This illustrates the restrictions of this quota-regulation approach (via tendering procedures) to introducing innovative and dynamically developing technologies, which are due to the ‘uncertainty’ about the future implementation and operation costs of respective installations. Finally, aspects of the NFFO process itself are supposed to have hampered the implementation of a more effective UK renewable energy policy. Accordingly, the irregular and centrally determined timing of NFFO rounds contributed to the gap between contracted and commissioned capacity. The stop–start nature of deployment under the NFFO is thought to have ‘hindered the creation of a stable, continuous demand for components. This probably hampered the development of a UK based manufacturing industry for capital goods and components’ (Cleirigh 2001: 40). Some developers of renewable energy projects thus indicated that the four-year gap between NFFO 5 and the introduction of the RO, which is the new policy instrument to support RETs since April 2002, was too long, hindering progress in this period (Cleirigh 2001). In conclusion, the analysis of the NFFO policy has shown the strong impact of the policy paradigm that dominated sectoral policy when this policy instrument was developed, that is, the strong belief in the positive effects of


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sectoral liberalisation. The focus on efficiency criteria was tightly anchored within central government and, owing to the unitary structure of UK government, other political authorities could hardly challenge it. The analysis of the implementation of the renewable energy policy has also illustrated the impact of the political-administrative system. Related to this, the lack of regulatory competencies and the weaker awareness of the relevance of renewable energy generation at the subsidiary political levels (local and regional levels) worsened the chances for successfully implementing this centrally issued policy.

THE COMMENCEMENT OF A RENEWABLE ENERGY POLICY IN GERMANY: 1985–98 The development of the renewable energy policy in Germany differs from that in the United Kingdom in two main respects. On the one hand, at the end of the 1980s and in the early 1990s the electricity industry was not being privatised and liberalised.7 On the other hand, the federal state structure and the features of a much more pluralist industry marked it. This resulted in much more decentralised patterns of sectoral governance. In the following, the analysis of the technology policies at the federal and state levels in Germany help to explain the breakthrough of wind power, which proved to be helpful for the development of substantial regulations favouring RETs on the federal level (that is, StrEG, the Electricity Feed Act). I argue that policy-making and implementation at the states level first positively influenced the perceptions of the policy-makers there, but later also influenced the perceptions at the federal level, resulting in the widely held view that it is feasible to extend renewable energy generation. Related to this, I then analyse the impact of the German federal system of government on the implementation of the national policy aimed at extending renewable energy generation. The Sectoral Governance of the Electricity Supply Industry in Germany and its Impact on Technology Policy for Renewable Energy Generation According to the German Constitution, energy policy is part of concurrent legislation; here all levels of government have the powers to legislate, but federal law takes precedence should a conflict arise. The federal level provides for the broad principles in utility regulation, whereas the states fill in the details and carry out the administration. Since the states have the administrative competencies for implementing the federal laws, they are guaranteed a great deal of freedom to pursue their own objectives in energy and electricity policy (Kusche 1998). One of the areas in which the states have regulatory

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competencies is their power to offer financial incentives, from the reserves of their own budgetary funds, in order to achieve their own targets in energy policy. Concerning the industry structure, ‘no strictly functionally differentiated monopolies existed like in the nationalized electricity industries in the UK’ (Schneider 1999b: 3). Instead, the German sectoral structure was characterised by a pluralistic industry, with a large number of utilities in possession of demarcation agreements guaranteeing them exclusive supply areas. This led to a heterogeneous structure in the monopolistic electricity industry with utilities operating at the local (Stadtwerke), the regional (Regionalversorger) and the transmission system operators’ (TSO’s) level (Verbundunternehmen). According to a study as of 1997, until then the sectoral industry was characterised by some 700 municipal utilities, about 60 regional utilities and nine TSOs (Schiffer 1997).8 Another decisive feature of the German electricity industry consists in the significant influence that local governments (municipalities and communities) have at their disposal for sectoral governance of the electricity utilities. In connection with the more decentralised industry structure, public aid programmes at the state levels encouraged the development and construction of small-scale RETs (especially wind power). At the end of the 1980s, a growing number of single operators of wind power plants that managed to connect up with the grid of mostly local and regional distribution network operators (DNOs) added political weight to two associations that fought to improve the unfavourable conditions for operators of wind power plants at that time (Paul 2001). These relevant renewable energy associations were the IWB (Inland Wind Power Association) and the DGW (German Society for Wind Energy).9 The lobbying activities of these associations were mainly focused on support policies favouring wind power in specific states (mainly North Rhine-Westphalia, Lower Saxony and Schleswig-Holstein). In these states, they increasingly convinced the responsible state ministries to issue political measures that exploited the technological potential of wind power.10 In this context, North Rhine-Westphalia was one of the first German states to be convinced to issue important support programmes for the development of RETs. In this state, a social democratic government initiated the RENprogramme (Programme for the Efficient Use of Energy and the Utilisation of Renewable Sources) in 1987 (interview MWMT NRW (Ministry of Economics, Medium-Sized Businesses and Technology of North RhineWestphalia), June 2002). Owing to its success, this programme served as an example for renewable energy initiatives in other German states in the following years (Staiß 2000). The programme encompassed measures for the technological development of renewables, for demonstration projects and for


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energy consulting. Until 1998, about 24000 projects could be carried out within that programme. It supported the construction of more than 700 wind power plants, with an installed capacity of more than 300 MW, and of about 3300 photovoltaic installations, with a capacity of more than 11 MW. With this programme the extension of the wind power capacity could be secured domestically even when there were decreasing federal subsidies for this technology (Staiß 2000). Another important state that started to support wind energy development on a larger scale in the late 1980s was SchleswigHolstein. The policies of this state provided incentives to improve investment conditions for the planning and construction of wind power plants (for example Windförderprogramm des Landes Schleswig-Holstein). The establishment of the DEWI (German Wind-Energy Institute) in Cuxhaven is another important example of the influence of state governments to develop renewable energy sources. The state government of Lower Saxony funded this institute, which actually proved to be one of the most advanced wind research institutes in the world during the 1990s. The task of this institute was to accelerate research on the technological and practical impacts to integrate wind power into the electricity system of the northern states in Germany (interview DEWI, September 2002).11 The Policy Development of a First Wider Renewable Energy Policy in Germany: The Electricity Feed Act (StrEG) from 1991 The following section illustrates the further development of the German renewable energy policy in the early 1990s, which resulted in the enactment of fixed price regulations in the StrEG (Electricity Feed Act) in 1991. Until then, the process of feeding electricity into German grids by independent generators had been regulated by an informal associational agreement reached between the BDI (Federation of German Industry), the VDEW (German Electricity Association) and the VIK (Association of the Industrial Energy Producers). The sectoral co-ordination by associational agreements is a traditional characteristic of the German electricity industry and has been highlighted by various other analyses (Schneider 1999a; see also Böllhoff, Chapter 2 and Bauer, Chapter 3 in this volume). According to the associational agreement, the grid operators (incumbent industry of the formerly monopolistic market) were not legally obliged to grant access to their grids to other energy generators. If access was granted, this was voluntary, and the grid operators (mainly local and regional utilities) reimbursed the fed-in electricity supplier at levels below costs avoided. This made feed-in a profitable business for incumbent utilities. Therefore, the independent operators of hydroelectric power stations, the most important renewable energy band at that time, had already long criticised existing feed-in arrangements based on the

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associational agreement. The hydroelectric power station operators, which were organised in the BDW (Federal Association of Hydroelectric Power Operators) and located more in the southern states of Germany (BadenWurttemberg, Bavaria), had long striven for obligatory electricity feed-in. Related to this, one decisive point in the agenda-setting process for the StrEG can be seen in the increasing relevance of lobbying groups for wind power in the northern part of Germany (IWB and DGW in North RhineWestphalia, Lower Saxony and Schleswig-Holstein). Their emergence coincided with substantial efforts of the established hydroelectric power industry (BDW) from the southern states of Germany to achieving fixed feedin tariffs for electricity-generating RETs. In connection with this, the promising development of wind energy technology in some northern states can be seen as an important factor, which considerably influenced the policy development of a first instrument aimed at marketing renewables in the national electricity sector. The successful breakthrough of wind power facilitated the establishment of a coalition of different party members in the Federal Parliament, which represented the hydroelectric power industry (mainly belonging to the Christian-Liberal parties of the Christian Democratic Union/Christian Social Union and the Free Democratic Party) and the emerging wind energy lobby (mainly belonging to the Social Democratic Party and the Green Party). Related to this, the Green Party failed with a first legislative initiative for a StrEG in the Federal Parliament in 1989. In this context, the European Association for Renewable Energies, Eurosolar,12 had an important role in co-ordinating the parliamentary preparation of law-based feed-in regulation between the different MPs. Actually, the law was enacted without a single dissenting vote on 7 December 1990 (interview Eurosolar, July 2001). At first sight, the StrEG introduced strong incentives for bringing RETs onto the electricity market: it defined that every operator of a renewable energy installation was eligible to receive a minimum unit price per kWh fed into the grid from the respective grid operator. This premium price was not dependent on the capacity of the electricity fed into the grid but coupled to the development of domestic electricity prices.13 In contrast to the United Kingdom, Germany has law-based price regulation, with legally defined feed-in prices. Because operators of renewable energy installations were able to count on reimbursement payments over a period of 20 years, this price regulation provided a stronger investment security in mediumand long-term planning than did the British system. Additionally, the grid operators were not only legally obligated to reimburse the renewable energy operators with the defined premium prices, but also had to connect any renewable energy generator to their grid and had to reduce their output.


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The Implementation of the Electricity Feed Act (StrEG): 1991–2000 Despite the effective enactment of law-based feed-in tariffs at the end of 1990, at the beginning the political and economic conditions for potential operators of renewable energy installations remained unsettled. In the first half of the 1990s, especially, the successful implementation of such projects depended greatly on the co-operation of the grid operator, who connected the installation to his network and reimbursed the fed-in electricity. Because the single feedin tariffs were calculated as a share of the average proceeds per kWh derived of the bulk of electricity sold by all utilities every year, this calculation mechanism resulted in some uncertainty. For operators of renewable energy installations it was difficult to forecast the development of feed-in prices in each year. Additionally, the grid operators had at their disposal several possibilities for discriminating against independent operators (for example calculation of costs to connect installation to the grid, costs for unplanned technical services, and so on). Especially against this background, the existence of additional state policies that supported renewable energy generation was decisive and added to investment security of potential investors. For that reason, both the design of the German policy instrument and the federal system of government, with concurrent legislative powers for energy regulations, proved to be beneficial to the construction of concrete renewable energy installations. Related to wind power, specific investment programmes of the states of Lower Saxony, Schleswig-Holstein and North Rhine-Westphalia increased financial security of possible operators in the early years after the StrEG came into force. Shortly after different programmes to develop the potential of wind power were initiated at the states’ level, the federal government was able to be convinced in 1989 to issue a broader initial demonstration programme to further develop wind power (100 MW Wind). With the success of both the state aid programmes and the first demonstration programme, the former BMFB (Federal Ministry of Research and Education) issued a further 250 MW programme in 1991 for launching wind power plants onto the electricity market. Owing to the higher degree of dispersion of the programmes between different states, the respective programmes were only of smaller dimensions. Consequently, these programmes lent themselves better to the development of small-scale wind power plants. However, the structure of the federal state was also important with regard to another issue: at the state level, the emerging renewable energy lobby, particularly that of the wind power industry, was able to enforce reforms in the building laws. These reforms drastically reduced planning and development cost for such installations caused by authorisation procedures. Accordingly, the German federal state provided better access points to emerging renewable

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energy associations, which effectively enforced political reforms suitable to expanding renewables at the states’ level. Such reforms had started in Lower Saxony in 1992, when the construction of wind power plants was privileged in the nature conservation laws (Landschaftsschutzgesetz). Similar regulatory reforms followed in 1994 for North Rhine-Westphalia. Related to this, the state’s competencies for defining its own energy policy targets in regional and spatial planning proved to be decisive. In this context, in 1994 Lower Saxony had already defined such targets of extending renewable energy generation in its spatial planning. Similarly, North Rhine-Westphalia was one of the first German states with tasks related to furthering renewable energy generation in the relevant planning policies. In the context of my argumentation it is crucial to point out that the regulations privileging the construction of RETs were initially laid down in the respective regulations of the individual states. Only later did the federal government adapt its respective regulatory policy to the developments at the state level. Related to this, the reform of the Federal Building Laws (BauGB) in 1996 was a decisive final breakthrough, which generally privileged the construction of RETs. The reforms also granted significant regulatory responsibilities to the local communities: specifically, they were allowed to define locally preferred construction areas for wind power plants in their usezoning plans. By actively defining such areas, the communities were able to exclude other areas from being used as building areas for wind power plants. This legislative guarantee gave local governments a sensible instrument for helping the local population accept such projects, thus preventing NIMBYism in the local population of Germany. As a consequence, the amendment of the BauGB triggered large-scale local planning activity, specifically aimed at defining the respective construction areas for wind power plants (interview BWE, October 2001). Correspondingly, the crucial role of the national planning system in actually bringing about such projects must be pointed out. With legislative powers divided between different levels of governance, the planning system provided the flexibility and efficiency to incorporate the renewable energy interests quickly into federal, regional and local plans.

THE NEW LABOUR REFORM OF THE RENEWABLE ENERGY POLICY IN THE UNITED KINGDOM: 1997–2004 Whereas utility regulation under the Conservative government relied unilaterally on the belief that free market economics could efficiently allocate resources to the benefit of all market participants, their ‘non-interventionist approach’ of regulating utilities became the focal point of public criticism because of increasing deficiencies in the quality of the utilities’ operation


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(Jones 2000). Consequently, distributional implications of introducing competition became a central focus of utility regulation after the Labour government came to power in May 1997 (Currie 1997; Young 2001). First, this change of government resulted in an increasing accentuation of equity over efficiency issues. Whereas equity issues mainly relate to concerns of consumer protection and other social issues in utility regulation (see also Bauer, Chapter 3 in this volume), the biggest challenge to the pursuit of economic efficiency in utilities policy emerges from environmental rather than equity objectives (MacKerron 2003). Dealing with the latter, the following section analyses the impact of Labour’s utility reforms and the upcoming challenge to expand renewable energy generation. Accordingly, I analyse the policy development and implementation of the Renewables Obligation as a new policy instrument for renewables in the UK. This analysis must adequately reflect the impacts of broader energy market reforms initiated by the Labour government in 1998. The British Electricity Market Reform as Impetus for a New Renewable Energy Policy? After the 1997 election brought Labour into government, the DTI comprehensively reviewed utility regulation. This review resulted in a Green Paper in the spring of 1998 entitled A Fair Deal for Consumers (DTI 1998), which accentuated the need to develop a new regulatory framework for the utilities. This regulatory framework was to ‘reflect the importance of the utility industries to the achievement of wider social and environmental objectives’ (DTI 1998, chapter 1.14, emphasis added). Because the New Labour government accentuated the major impact of the utility industry on the environment, the regulatory framework was to be ‘set in the right way to ensure a positive contribution by the utilities to the environmental objectives of the Government’s strategy for sustainable development’ (DTI 1998, chapter 1.16).14 This provided the impetus to use the utility reforms as an opportunity to reform the renewable energy policy as well. However, the main reason for the fundamental reforms in utility regulation was to improve the protection of consumer interests (interviews DTI and OFGEM, both in November 2001). Therefore, the further development of the renewable energy policy in the United Kingdom remained committed to a market-based approach. During 1999 and early 2000, representatives of very different interest groups from industry, society and public administration participated in the consultation processes for the reform of utility regulation, which finally led to a new regulatory framework for the gas and electricity markets, that is, the Utilities Act 2000 (Graham 2000b).15 The most important part of this reform concerned the revision of the trading arrangements for electricity, which was supposed to further competition, mainly in the generation market. The early establishment

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of new trading arrangements illustrates the persisting primary importance of market creation issues in British energy policy. Accordingly, new market rules for electricity trading (New Electricity Trading Arrangements, NETA) could be achieved already, one year before respective reforms for renewable energy generation (NETA started operation in March 2001, the RO in April 2002). Accordingly, the environmental policy for renewables clearly remained a path-dependent result of the economic electricity market reforms in 2001 (interview DTI, November 2001). For that reason, I describe the operation of NETA and then illustrate its impact on renewable energy operators. After that, I conclude with a description and the first implementation experiences of, RO. The Impact of Recent Market Reforms on Renewable Energy Generation: From the Electricity Pool to New Electricity Trading Arrangements (NETA) The NETA started operation on 27 March 2001.16 Since then, the energy regulator, OFGEM, has conducted first reviews of the new trading arrangements. Concerning the main target of the reforms, that is, the desire to force competition in the generation market and bring prices in the wholesale market down further, NETA proved to be successful. As a consequence of decreasing wholesale market prices, smaller generators, such as renewable energy generators and combined heat and power (CHP) operators, suffered under substantially decreasing revenues. On average, the prices for their exports went down by 17 per cent. Export prices for wind power decreased even more than usual, that is, by 27 per cent (OFGEM 2001b). As a result, the introduction of NETA has put smaller energy generators, who do not fall under existing NFFO orders,17 under further pressure. Under NETA, the weak negotiation position of small renewable energy generators is the major problem. The main reason for this is the lack of ability to predict the generation output from some of these technologies (especially of wind power). Under NETA, this lack of predictability jeopardises the operation of such technologies, because it makes it more likely that they will suffer from imbalance charges when signing the Balance and Settlement Code (BSC), which sanctions deviations from the predicted supply and demand in order to keep the national grid in balance. In accordance with this weak negotiation position, the vast majority of smaller generators (98 per cent) opted for the local supply option (OFGEM 2001b). In line with this contracting strategy, small operators normally have to negotiate their generated output for one year with the local supplier where they feed in their generated output. Precisely because this short-term contracting strategy is rather unfavourable for independent generators, the DTI wanted them to


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participate more actively in NETA, something that, in turn, should make it possible to negotiate longer-term trading contracts. Related to this, the bundling of generation output from different independent generators (that is, consolidation of their generated output) should make it possible for them to disseminate the risk of participating in the BSC (OFGEM 2002). However, opportunities for consolidation, as a regulatory strategy to strengthen the market position of renewable energy generators, only exist at the margins. Obviously, the physical limits of such strategies are not adequately appreciated precisely because the NETA is built for large-scale plants, capable of delivering predictable power flows (Helm 2002). Nevertheless, OFGEM has only recently changed the NETA such that it can provide smaller and independent generators with a more favourable basis for consolidation: they are now able to split their generation output into two products. One is the predictable part of their output, which they can normally sell to their customer, for example the traditional electricity supplier. The less predictable output is to be sold to electricity trading companies, which are supposed to consolidate the output of smaller generators and thus minimise their risk (Bauknecht et al. 2002). The Reform of the Renewable Energy Policy: The Renewables Obligation As mentioned earlier, the change from the Conservative to the Labour government in 1997 heralded a substantial change in the national utility policy, which gave sectoral regulation a more social and environmental look (DTI 2001a). Related to this, the upcoming challenge to provide concrete measures to counter global warming lent new attention to RET. In this regard, the international negotiations on climate change that resulted in the Kyoto Protocol of 1997 were also instrumental in generating more support for a more active policy for renewables (Oberthür and Ott 1999). However, the successful construction of respective renewable energy capacities in other European countries during the 1990s (besides Germany, specifically in Denmark and Spain) might have also swayed the UK government to provide a more substantial policy in that area (interview DTI, November 2001). Hence, increasing problems in implementing the NFFO policy, together with an increasingly positive view of renewable energies in the New Labour government resulted in reform efforts targeted at improving the situation for RET. These efforts must be analysed against the background of the general reforms of the regulatory framework for utility regulation. Accordingly, the adoption of the Utilities Act 2000 established a new policy instrument aimed at promoting renewable energy sources, that is, the RO. The RO will place a

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legal obligation on all licensed electricity suppliers to produce evidence that either they have supplied a specified proportion of their electricity supplies from renewable energy sources to customers, or that another electricity supplier has done so. Suppliers are required to produce evidence of their compliance with this obligation to the Authority by a specified day each year. Evidence can be via certificates which the Authority (Ofgem) issues and/or paying buyout. (OFGEM 2001a: 1)

Because the RO will place an obligation on all licensed electricity suppliers in England and Wales to take a growing percentage of their total sales from eligible renewable sources, the new RO regime follows the pursued path of a quota regulation. Nevertheless, it implies a significant shift in UK policy because electricity suppliers are strictly obliged to take an increasing share of renewable energy. The obligation on each supplier is expected ‘to rise from 3 per cent of sales in the first obligation period, ending on 31 March 2003, to 10.4 per cent of sales in the year ending 31 March 2011’ (DTI 2001b: 4). After increasing criticism voiced by the British renewables industry that demanded further support beyond 2010, the DTI decided to expand the government’s development goal for renewables to 15.4 per cent by 2016. This decision, made in December 2003, aims to secure the investment security for the growing renewable energy industry in the UK beyond 2010 (Jones 2004). In this context, the implementation of the certificate system also implies that OFGEM will increasingly play a role in achieving environmental targets in energy policy.18 Hence, the introduction of the RO is a further indication that privatisation and liberalisation do not necessarily erode the regulatory obligations of the governmental and sectoral regulators once competition in the sector has been successfully established (see also Bauer, Chapter 3 in this volume). The early experience with the RO evidently indicates a partial improvement of the economic conditions for renewable energy installations in the liberalised energy market (OFGEM 2004). In the first year of the RO regime (April 2002–March 2003), a certificate price of £46.75/MWh could be achieved. This corresponded with proceeds of 4.5p/kWh per ROC for any operator of a renewable energy installation.19 To calculate the total proceeds of any renewable energy generator, the income of selling electricity under NETA must be added to the ROC value of 4.5p/kWh. Between April 2002 and March 2003, the achievable electricity prices on the wholesale market varied between 1.5p/kWh and 1.8p/kWh. Hence a total proceed of about 6.5p/kWh was attainable for renewable energy generators in the first year under the RO. As expected, the economic conditions under the RO regime further improved in the second year of operation (April 2003–March 2004), with ROC prices ranging between £45.93/MWh and £49.11/MWh. Against the background of improving economic conditions, the RO


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currently triggers important investments in favour of the expansion of offshore wind power in England and Wales. Especially important are plans of the UK government to increase offshore wind power generation (DTI 2002). To realise the huge potential of offshore wind quickly, the UK government initiated important planning reforms to secure effectively the required planning permissions. Owing to the centralised governance of the national planning system, the UK government was able easily to reform the planning system for offshore wind farms. In view of the fact that planning procedures within the 12-mile zone at seasides were under the jurisdiction of the British Crown, as early as 2000 the UK government was in a good position to simplify quickly the planning procedures into a one-stop-shop process.20 A first tendering procedure for selected offshore sites was carried out by the DTI in December 2000. Its target was to implement 18 offshore wind farm projects at 13 sites with a total capacity of 1500 MW. This tendering procedure was finalised in April 2001. By early 2003, the construction of eight wind farm projects had been permitted. After further consultations with the British Crown, a second tendering procedure for offshore wind farms was planned for the first half of 2003. In the end, the second tendering procedure (in combination with the first) resulted in plans for the construction of a total generation capacity of 6000 MW (DTI 2002). In spite of the promising developments in exploring the offshore potential in England and Wales, it is difficult to believe that the ambitious renewable energy targets set by the UK government for 2010 (10 per cent of the gross electricity generation capacity) can be achieved with the existing RO instrument. To realise this target, the generation capacity of renewables would nearly have had to be doubled between December 2001 (4.9 TWh) and March 2004 (8.6 TWh). Additionally, an expansion of renewable generation capacity by around four TWh per annum until 2010 would be requisite. In fact, however, the renewable energy capacity in England and Wales could only be increased by 0.6 TWh per annum between 1997 and 2001. The major part of this increase was secured by the expansion of the use of landfill gas, which is now approaching the natural limit, given existing resources. Accordingly, the most important RET making profit in the first year under the RO in England/Wales was still landfill gas. The established landfill gas installations generated an output of about 2.6 GWh, followed by biomass with an output of 0.96 GWh. Against the background of unresolved problems for a more successful expansion of decentralised RET (that is, especially onshore wind power and biomass), many energy experts in the England and Wales cast into doubt whether the national renewable energy targets will be achieved (Smith and Watson 2002). The continuing existence of institutional barriers is to be exemplified with the example of onshore wind, which remained behind in third place with a total generation output of only about 0.65 GWh. One of

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these restrictions concerns the lack of political support at the local and regional levels for assisting the UK government in realising the national renewable energy targets. Especially in England, the local resistance and NIMBYsm against the construction of onshore wind farms remain high. The success in preventing such projects in this region can be attributed to contradictory policy targets in the local planning guidance and the national energy policies (interview BWEA, November 2001). For that reason, recent planning reforms within the centralised governance structure aim to secure a better evaluation of national renewable energy targets in the planning procedures at the regional and local levels (DETR 2000a). However, the incorporation of national renewable energy targets into local and regional planning policies proved to be more challenging than in the case of the offshore projects. One reason it is such a demanding task to incorporate sustainability targets into local policies is that the tradition of regional institutions in the governmental system of the UK is lacking. In this context, current devolution reforms of New Labour aim to strengthen the role of regional institutions within the UK’s political system (Newman 2002). In this context, the recent establishment of regional development agencies (RDAs) is supportive in the attempt to overcome existing institutional and political barriers to achieve a more effective implementation of renewable energy projects in England and Wales. Under the RDAs, which were primarily established to increase the effectiveness of governmental and European business development policies, but also to assist the central government in realising its sustainability strategy in the regions, several separate agencies have been founded since 2001 with the specific task of promoting renewables. By the end of 2003, the following three regional Renewable Energy Agencies had been established: Renewables Northwest, Renewables East and Regen SW. The superordinated RDA (Northwest Development Agency, East of England Development Agency and South West Regional Development Agency) funds each of these agencies. These institutional reforms establish a further factor, improving the political conditions necessary for successfully implementing renewable energy policy in the UK (interviews BWEA, November 2001; NWP, March 2003).21 A further serious restriction relates to the design of the RO regime. Especially if the scales of sunken costs caused by the investments into such infrastructure projects are taken into account, the highly uncertain development of future ROC prices constitutes a significant restriction to independent and small investors. Related to this, a forecast of the energy consultancy Platts gives cause for concern that ROC prices might crash with the start of operation of planned onshore wind turbines, planned for 2006/07 at the latest. According to these estimations, ROC prices could fall from their current level, of around £48/MWh, by a third, to just over £33/MWh in 2007


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(Platts 2004). This forecast alone might scare off many investors in new renewable plants and thus threaten the ambitious renewable energy targets of the UK government. The lack of adequate regulatory provisions with regard to the distribution network is identified as a further, technical, restriction to more successful implementation of renewables in England and Wales. The unclear distribution of costs between the incumbent network operator and the independent operator for connecting renewable energy installations to the grid is specified as a further discriminating factor, which increases cost uncertainty for independent operators. By 2002, the charging structure for the use of the distribution grid still failed to provide a non-discriminatory economic calculation of decentralised electricity generation (for example, by properly integrating the element of avoided costs of electricity generation into the calculation). In general, a change of OFGEM’s regulatory philosophy is required in order to provide for more ‘active distribution grids’. As Smith and Watson have pointed out, this shift requires substantial investment [to provide for non-discriminating regulatory provisions for embedded generation] enabled by a more cost-reflective charging structure for the use of distribution wires. The distribution network operators (DNO[s]) need to be able to make the necessary infrastructure investments – investments that could currently fall foul of Ofgem’s rules because they are not seen as ‘essential’ to current operations. In short, DNO[s] currently have little incentive to promote embedded generation from renewables. (Smith and Watson 2002: 4)

In this context, OFGEM has started to extend its knowledge base about regulating embedded generation by establishing the Embedded Generation Working Group. This expert group brings together different professionals who are working in the field of decentralised energy generation (for example, experts of CHP and renewable energy associations, but also of the incumbent industry, and so on). One initial result of this working group was the elaboration of new tariff structures for embedded generation, which could be finished in January 2001 (OFGEM 2001c). In conclusion, the uncertainties of the future revenue and cost structure for independent generators remain an unsolved problem under the current NETA and RO regime (Mitchell et al. 2004). In this regard, the main restriction of the British system for renewables is seen in the fact that it rather provides support to the vertically integrated incumbent industry and neglects the potentials of smaller operators to contribute to the national renewable energy targets (interviews Energy Saving Trust and University of Warwick, both March 2003). Nevertheless, the analysis of the renewable energy policy in England and Wales was able to demonstrate that the change to the New Labour

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government triggered some important reforms to extend sustainable energy generation. However, these reforms developed along the lines of instrumental path-dependency, because the principle of quota regulation in the British system is sustained. In this regard, the main problem of quota-oriented support systems of renewables seems to remain unsolved, that is, to provide for longterm investment security, especially for decentralised operating RETs that are not yet competitive.

THE REFORMS IN GERMANY: FROM THE RENEWABLE ENERGY SOURCES ACT 2000 TO THE AMENDED ACT OF 2004 In this section, I analyse recent reforms of the German renewable energy policy. Despite the successful implementation of the StrEG, the federal government also had to reform its policy. Similar to the reform in the UK, the reform in Germany accompanied a change in government: in September 1998, a coalition formed by the Social Democratic Party and the Green Party came to power. With the liberalisation of the German energy market in April 1998, the existing renewable energy policy was reformed primarily to adapt it to increasingly competitive market conditions. Precisely the success of the StrEG (1991) in expanding renewable energy generation from wind, biomass and hydroelectric power required adaptations of existing regulatory provisions. In the following subsection I describe the reasons for the reform and elaborate the contents of the new regulatory policy. The Increasing Need to Reform the Electricity Feed Act (StrEG) With the reform of the Federal Energy Law in April 1998, the electricity market in Germany was liberalised. The monopolistic structure of the German electricity market was legally abolished by prohibiting the existence of demarcation contracts that formerly guaranteed single utilities protected sale areas. As a result of falling world market prices for fossil fuels, electricity prices had already declined before liberalisation started in Germany. Faced with the prospect of further price decreases due to the upcoming market liberalisation, the operators of renewable energy installations in the German electricity market had to fight with decreasing feed-in tariffs since 1997 because the development of feed-in tariffs was coupled with the development of national electricity prices. In order to sustain a secure investment basis for the growing German renewable energy industry, the German renewable energy associations (for example, BEE (German Renewable Energy Federation), BWE and Eurosolar) were quick to demand the


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decoupling of feed-in tariffs from the general development of electricity market prices. Furthermore, the tremendous growth in the number of wind power plants that occurred in the course of the 1990s, specifically in the maritime regions (especially in Lower Saxony and in Schleswig-Holstein), caused higher reimbursement costs for the utilities in those areas than in areas with less hardwired renewable energy installations. Especially since 1995, when the number of wind power plants nearly doubled in comparison to the previous year, the incumbent industry, represented by the VDEW, has therefore challenged the constitutionality of this law (Renz 2001). Related to this, the BVerfG (Federal Constitutional Court) played a pivotal role in defending the StrEG against the incumbent’s efforts to topple the law. From 1995 on, the BVerfG looked into that act several times, but did not deny its constitutionality (Eurosolar 1995; 1996; 1998). The required adaptations to liberalised market conditions and the discrimination that some utilities exercised against others were dealt with in a reform of the StrEG, which in March 2000 resulted in the EEG (Renewable Energy Sources Act). The most important elements of this reform will be described in the following subsection. The Renewable Energy Sources Act (EEG): The Path-Dependent Development of Feed-In Tariffs in Germany After the party coalition of the Social Democratic Party and Green Party had taken over power in autumn 1998, it took nearly a year for consultations about possible amendments of the existing StrEG to start. Discussions about possible reforms commenced with first proposals made by the Green Party in June 1999 and were further specified by several expert opinions of different renewable energy associations (BEE, BWE and Eurosolar) and certain research institutes (DEWI, DLR (German Aerospace Centre) during the autumn of 1999. In this context it is important to note that during these months the BMU (Federal Ministry for the Environment, Nature Conservation and Nuclear Safety) took over the initiative to amend the StrEG, although it was not responsible in the first place (in fact the regulation of renewables was the responsibility of the BMWT (Federal Ministry of Economics and Technology)). Initially, the BMU successfully co-ordinated the consultations to amend the existing regulations by closely collaborating with the renewable energy associations (BDW, BWE, BEE), certain research institutes, several MPs of the governing parties and the advocacy group, Eurosolar. However, after hard-fought discussions between the BMWT and the BMU over initial drafts for a new law, the development of substantial regulations for a further expansion of renewables was threatening to stall. To break the deadlock, certain energy experts of the two governing parties, the SPD and the

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Greens, which were organised in or collaborated with Eurosolar, developed their own legislative proposal with the title, Erneuerbare-Energien-Gesetz (EEG, Renewable Energy Sources Act). The readings of this legislative draft in the Federal Parliament took place between December 1999 and February 2000. After the third reading, the EEG was passed by Parliament on 25 February 2000 and came into force on 1 April 2000. One essential element was the establishment of a nation-wide equalisation scheme to ensure a non-discriminatory allocation of the charges resulting from reimbursement obligations of network operators. The calculation scheme that was introduced with the enactment of the EEG in April 2000 is an interesting case of hierarchically imposed self-regulation (Mayntz and Scharpf 1995). To balance the different reimbursement costs of the German network operators, the calculation scheme is managed privately by the newly founded VDN (Association of the German System Operators).22 Furthermore, the EEG provided for a further improvement of the feed-in tariffs, especially for those technologies, which were not sufficiently advanced under the StrEG. Apart from the prosperous expansion of wind power and smaller advancements for both biomass and small hydroelectric power installations, specific Members of Parliament of the Social Democratic and the Green Party also called for higher tariffs. An improvement of support policies was especially claimed for those technologies that were supposed to be characterised by large technological possibilities to further decrease generation costs. This was supposed to be of particular importance in the cases of offshore wind power and photovoltaic.23 However, the amendment also meant to improve the situation for biomass/biogas and for geothermal power. Accordingly, the EEG 2000 defined the premium prices shown in Table 6.3 for different technology bands. As already indicated, in order to stimulate an improvement in generation efficiency the EEG introduced degressive reimbursement rates for the different technology bands, with rates depending on the number of years of operation.24 To that purpose, every two years the BMU – and before 2002 the BMWT – is (was) obliged to deliver a report on the progress of the EEG, taking account of the market introduction and the cost development of respective technologies. It also proposes adjustments, adapting the price regulations to the respective technological progress. On the one hand and viewed from a distance, the EEG implied a systematic and pathdependent continuation of the former StrEG, since it further differentiates the financial promotion of specific renewables. On the other hand, a closer look reveals an increase in the relevance of efficiency criteria with regard to the definition of the specific feed-in tariffs. The parliamentary elections of September 2002 confirmed the existing government coalition formed by the SPD and Green parties. One important result of the negotiations over the contents of the coalition policy, which was


Table 6.3

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The Renewable Sources Act 2000

Technology

Law-based feed-in tariff

Wind power (onshore and offshore)

Fix starting tariff for newly After five years decreasing commissioned onshore tariff rates depending on installations at a rate of installation efficiency 9.0 ct/kWh, decreasing For new installations starting tariffs for constructed after 1 January installations commissioned 2002: decline of feed-in in the next years tariff by 1.5% per annum Eligibility under fixed tariff: onshore installations ➝ five years, offshore installations ➝ nine years Minimum tariff of 6.1 ct/kWh for installations commissioned in 2002, decreasing tariffs in the following years 6.65–7.67 ct/kWh Level of tariff depending on generation output of installation No decreasing tariffs for the next years Starting tariffs of biomass Level of tariff depending on installations commissioned generation output of in 2002 at a rate of 8.6–10.1 installation ct/kWh, slow decrease in Decrease of feed-in tariff by the following years 1% per annum 7.16–8.95 ct/kWh Level of tariff depending on generation output of installation No decreasing tariffs for the next years 45.7–56.8 ct/kWh Level of tariff depending on generation capacity and construction design Decrease of feed-in tariff for newly commissioned installations by 5% per annum

Hydro power, landfill and sewage gas

Biomass

Geothermal energy

Photovoltaic

Specifications

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to influence the further development of the German renewable energy policy, consisted in the transfer of the regulatory competence for renewables from the former BMWT to the BMU. While the newly-formed BMWA (Federal Ministry for Economics and Labour) continued to favour the self-regulatory and negotiated third party access model for the natural monopoly of the electricity and gas grid (Becker 2000; Schneider 1999a), the BMU, vested with new responsibilities for renewables, quickly started to develop a first draft to amend the existing EEG. Whereas the Green Party demanded a further improvement of the policy framework of renewables in order to comply with the targets of the National Climate Programme (BMU 2000), the amendment of the Act was also to incorporate a European directive on the promotion of electricity from renewable energy sources (Directive 2001/77/EC), which came into force in July 2001.25 Even before the BMU was able to finalise a first draft for the amendment of the EEG, the different energy-intensive branches of German industry (for example, aluminium, cement and steel) and their associations (for example, the BDI and the VIK) lobbied successfully to introduce a hardship clause into the act in March 2003. Under certain conditions, this clause guarantees that energy companies will receive a reduction in their energy bill by decreasing the share they are to pay for the reimbursement scheme. With regard to the network regulation of the energy industry, it is important to emphasise that this compromise by the BMU was coupled with the confirmation that the BMWA would set up a regulatory authority for the energy market and that they would reform existing competition rules of network regulation (interview BEE, March 2003). In August 2003, the BMU proposed a first draft to amend the EEG in the second election period of the Social Democratic–Green Party coalition. This proposal contained lower price regulations for onshore wind power and a reduction of the time during which less efficient wind power plants were to be eligible. Whereas the support conditions were to become tighter for onshore wind power, the proposal suggested further improvements to the benefit of offshore wind power. For that reason, the period for the payment of a higher feed-in tariff was to be extended to a minimum of 12 years. Further improvements were also planned for large hydroelectric power stations (over 5 MW). In this context, the German TSO EnBW (Energie Baden-Württemberg AG) successfully lobbied, via an initiative in the Federal Council, to expand the application of the EEG to large-scale installations.26 As with the plans for wind power, the improvement of the policy conditions for large-scale and centralised hydro power stations was to be to the detriment of the smaller installations. According to the proposal, smaller hydro power stations (under 500 kW) were only to be eligible under the EEG if they operated in connection with an already existing water dam or if their operation


175

would significantly improve the ecological state of the respective river or lake (interview EnBW, February 2004). With the implementation of this provision, the decision about the eligibility of small hydro power stations would largely be transferred to the discretion of nature protection agencies. Because in the German federal system the states have the authority to regulate the details of the nature protection law, the German states were to increase their influence in determining the requisites for such projects. Furthermore, improvements of feed-in tariffs for biomass and biogas were suggested. With regard to existing plans to sustain the high expansion dynamic of the photovoltaic industry, it is crucial to accentuate the significant policy expertise assembled in the German Federal Parliament. During Autumn 2003, it emerged that the enactment of the EEG would have to be delayed. Therefore, improved feed-in tariffs for photovoltaic would not be enacted until the end of December 2003. Against the background that the 100000 unit solar roof programme was set to expire at the end of 2003, the advocacy group of Eurosolar and other Members of Parliament supporting renewables called for an earlier enactment of separate regulations (Fotovoltaik-Vorschaltgesetz). Because existing feed-in tariffs under the EEG did not ensure a profitable operation of photovoltaic and solar installations, a smooth transition with quickly improved feed-in tariffs was deemed necessary to prevent a financial threat for the growing solar industry. Accordingly, the proposed preregulatory programme for photovoltaic could be enacted in November 2003. Similar to the policy development of the EEG in 2000, several members of the Federal Parliament, who had dealt with renewables since the early enactment of the StrEG, successfully fought for further improvements to the administrative draft formerly developed by the BMU. Before, the BMWA was able to put through more severe feed-in regulations for onshore wind power by defining a stricter degressive rate rule (2.0 instead of 1.5 per cent per annum) and abolishing the eligibility for installations at sites not complying with specific efficiency criteria. It also achieved stricter regulations for biomass by limiting the support period for such installations from 20 to 15 years. During the further readings of the proposed EEG in Parliament and later hearings in the Expert Committees, the Members of Parliament of the governing coalition parties (the SPD and the Greens) succeeded in re-establishing the former conditions for onshore wind power, biomass and small hydro power. However, the federal structure of the German governmental system greatly influenced the rest of the policy-making process. This was in part due to the requirement to achieve a final consent in the Federal Council, which at that time was dominated by the opposition parties of the CDU/CSU and the FDP. In order to ensure that the new regulations were enacted quickly, the federal government quickly accepted the main claim of these parties to again reduce the promotion rules for onshore wind power. Whereas the Federal Council

176


accepted the improved regulations for hydro power, biomass, offshore wind power and geothermal energy, it put through tougher regulations with regard to onshore wind power. In the end, the most important regulations of the EEG 2004 were those listed in Table 6.4. Table 6.4

The Amended Renewable Sources Act 2004

Technology

Law-based feed-in tariff

Wind power (offshore)

Minimum tariff of 6.19 Decreasing rate of 2% per ct/kWh, additional rate annum, starting with up to 2.91 ct/kWh if 1 January 2008 installation is constructed within 3 sea-miles offshore, eligibility under that tariff for installations that are built until 31 December 2010 for 12 years Lowering of minimum tariff Suspension of feed-in from 5.9 to 5.5 ct/kWh obligation for network Additional rate for newly operators if generation installed installations efficiency at a specific site depending on their is below 60% of the usual generation efficiency output at reference site (up to 3.2 ct/kWh) Increase of decline for feed-in tariff to 2% per annum Extension of support to large Limiting of support period power stations (>500 kW), to 30 years improvement of feed-in tariff for small installations to 9.67 ct/kWh Introduction of different Retention of 20 years support bonus systems to support for biomass installations both biomass and CHP Increase of degression rate Additional rates if raw to 1.5% per annum materials and energy crops are used as fuel Feed-in tariffs ranging between 6.65 ct/kWh and 11.5 ct/kWh depending on the generation output and used fuel

Wind power (onshore)

Hydro power

Biomass landfill, sewage and marsh gas

Specifications


Geothermal Photovoltaic

7.16 ct/kWh (>20 MW) to 15 ct/kWh (

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